The optimal pricing of computer software and other products with high switching costs

The paper studies the determinants of the optimum prices of computer programs and their upgrades. It is based on the notion that because of the human capital invested in the use of a computer program by its user, this product has high switching costs, and on the finding that pirates are responsible for generating over 80% of new software sales. A model to maximize the present value of the program to the program house is constructed to determine the optimal prices of initial programs and for those upgrading their programs. It is shown that an upward shift of the demand function of upgrades leads to an increase in the optimum price of upgrades and to a decline in that of initial copies. However, and upward shift of the demand function of initial copies increases their optimal price without affecting that of upgrades. The price of upgrades is higher, the smaller (greater) the absolute value of the derivative of the initial copy demand with respect to the upgrade price (its own price), the smaller the number of pirates purchasing their initial legitimate copies and, normally, the later they do it. The prices of these goods often move in opposite directions despite the fact that the goods can best be characterized as complements. Copy-protection is generally not optimal with standard programs having competing unprotected products, and it is normally optimal to use a drug pusher's strategy in pricing and in other respects: get the user hooked and cash in on the upgrades.     

Computers And Growth

The purpose of this paper is to describe the impact of investment in computers on the growth of the U.S. economy. The economic literature on computers is relatively rich in information on the decline in computer prices and the growth of computer investment. Constant quality price indices for computers have been included in the U.S. National Income and Product Accounts (NIPA) since 1986. These indices employ state of the art methodology to capture the rapid evolution of computer technology.

While the annual inflation rate for overall investment has been 3.66 percent for the period 1958 to 1992, computer prices have declined by 19.13 percent per year! Similarly, overall investment grew at 3.82 percent, while investment in computers increased at an astounding 44.34 percent! These familiar facts describe growth in the output of computers. The objective of this paper is to complete the picture by analyzing the growth of computer services as inputs.

In a pioneering paper Bresnahan (1986) has focused on pecuniary externalities arising from the rapid decline in computer prices. Griliches (1992, 1994) has emphasized the distinction between pecuniary and nonpecuniary externalities in the impact of computer investment on growth. This paper is limited to pecuniary externalities or the impact of reductions in computer prices on the substitution of computer services for other inputs. As Griliches (1992) points out, this is an essential first step in identifying nonpecuniary externalities or ‘spill-overs’ through the impact of a decline in computer prices on productivity growth. ^{* *}Brynjolfsson (1993) has proveded a detailed survey of studies of nonpecuniary externalities or ‘spill overs’. Recent studies include those of Brynjolfsson and Hitt (1994a, 1994b) and Lichtenberg (1993).

In two important papers Stephen D. Oliner (1993, 1994) has introduced a model of computer technology that greatly facilitates the measurement of computer services as inputs. In this paper we estimate computer stocks and flows of computer services for all forms of computer investment included in NIPA. We construct estimates of computer services parallel to NIPA data on computer investment by combining these data with information on computer inventories. For example, the International Data Corporation (IDC) Census of Computer Processors includes an annual inventory of processors in the U.S.

In Section 1 we present data on investment in computers and constant quality price indices from NIPA. These data incorporate important innovations in modeling computer technology stemming from a joint study by IBM and the Bureau of Economic Analysis (BEA) completed in 1985. This study utilized a ‘hedonic’ methodology for constructing an econometric model of computer prices that accurately reflects rapid changes in computer technology. This methodology generates an index of computer prices that holds the quality of computers constant.

In Section 2 we present the model of computer services originated by Oliner (1993,1994). This differs in important respects from the model of capital services used in the previous studies of U.S. economic growth surveyed by Jorgenson (1989,1990). The model employed in previous studies is based on the decline in productive capacity with the chronological age of a capital good. Oliner assumes that computers maintain their productive capacity until they are retired. Decline in productive capacity occurs only through removal of used computers from the inventory through retirement.

In Section 3 we construct estimates of stocks of computers that incorporate IDC data on computer inventories and derive the implied flow of computer services. While output of computer investments has grown very rapidly, the input of computer services has grown even faster. The price of these services has declined at 23.22 percent per year over the period 1958 to 1992, while the input of these services has grown at 52.82 percent! This is prima facie evidence of an important role for computer price declines as a source of pecuniary externalities.

In Section 4 we combine computer services with the services of other types of capital to produce a measure of capital input into the U.S. economy. We link this with labor input to obtain the contributions of both inputs to U.S. economic growth, arriving at the growth of productivity as a residual. We find that the contribution of computer services to input into the U.S. economy is far more important than the contribution of computer investments to output. This is a significant step toward resolution of the Solow paradox: ‘We see computers everywhere except in the productivity statistics. ^{* *}Robert M. Solow, quoted by Brynjolfsson (1993). Declines in computer prices generate very sizable pecuniary externalities through the substitution of computer services for other inputs. By contrast Solow focuses on nonpecuniary externalities that would appear as productivity growth.

In Section 5 we conclude that information on inventories of computers is critical in quantifying the role of computer services as inputs. The constant quality price indices for computers incorporated into NIPA are also essential. A price index for computers that reflects only general trends in inflation would result in a highly distorted perspective on the growth of GDP and capital services, especially during the past decade. To capture the contribution of all forms of investment to U.S. economic growth, similar price indices should be included in NIPA for capital goods with rapidly evolving technologies, as proposed by Gordon (1990).

The long term goal should be a unified system of income. product, and wealth accounts, like that proposed by Laurits Christensen and Jorgenson (1973) and Jorgenson (1980). This incorporates capital stocks, capital services, and their prices. Achieving this goal will necessitate much greater elaboration of the accounting system described in Section 3. These accounts would incorporate data on prices and quantities of investment, stocks of assets, and capital services for all forms of capital employed in the U.S. economy.     

中国服务业核算及其存在的问题研究

本文重点介绍中国服务业的范围和服务业生产核算分类的变化 ,探讨中国服务业核算存在的问题 ,并阐述国家统计局改进中国服务业核算的进一步举措。在中国国内生产总值核算中 ,服务业是指除农业、林业、牧业、渔业、采矿业、制造业、电力燃气及水的生产和供应业、建筑业以外的所有行业。中国从 1 985年开始国内生产总值核算。1 994年 ,根据国家技术监督局颁布的《国民经济行业分类和代码》和我国资料来源的实际情况 ,国家统计局对服务业生产核算的分类进行了调整。本文对调整前后两种分类之间的差别进行了比较。由于中国长期采用MPS体系 ,核算的历史较短 ,所以目前服务业核算仍存在许多薄弱环节。本文阐述了服务业现价核算和不变价核算中存在的若干问题 ,包括资料来源缺口和口径问题 ,金融媒介服务的处理问题 ,房地产业核算问题 ,计算机软件的处理问题 ,服务业价格指数问题等等。为了完善服务业核算 ,国家统计局正在准备采取各种措施 ,本文对此也进行了相应的阐述     

Prices,product differentiation and quality measurement: A comparison between hedonic and matched model methods

The paper provides an analysis of the problems of construction of quality-adjusted price indexes within the framework of the theory of product differentiation. In the general case of price-making behaviour on the part of firms, hedonic regressions are defined on the basis of reduced forms of the equation relating equilibrium prices to product characteristics. The paper considers the reduced form given by the marginal cost function and shows that the Laspeyres hedonic price index provides a lower bound to the quality-adjusted rate of price change while the Paasche hedonic price index provides an upper bound to the quality-adjusted rate of price change. The properties of hedonic price indexes are compared with those of matched model indexes. The theory is applied to the study of personal computer prices in Italy during the 1995–2000 period.     

Moore's Law and Learning by Doing

We model Moore's law as efficiency of computer producers that rises as a by-product of their experience. We find the following: (1) Because computer prices fall much faster than the prices of electricity-driven and diesel-driven capital ever did, growth in the coming decades should be very fast. (2) The obsolescence of firms today occurs faster than before, partly because the physical capital they own becomes obsolete faster. Journal of Economic Literature Classification Number: O3.     

Piracy in a two-sided software market

This paper studies the impact of software piracy in a two-sided-market setting. Software platforms attract developers and users to maximize their profits. The equilibrium price structure is affected by piracy: license fees to developers are higher with more software protection but the impact on user prices is ambiguous. A conflict between platforms and software developers over software protection may arise: whereas one side benefits from better protection, the other party loses out. Under platform compatibility, this conflict is no longer present.     

INTELLECTUAL PROPERTY RIGHTS IN A KNOWLEDGE-BASED ECONOMY: A NEW FRAME-OF-ANALYSIS

The debate on software intellectual property rights (IPRs) has not only highlighted fundamental issues regarding the scheme of protection that software enjoys, it has also pointed out major gaps in the representation of computer programs as economic goods. In this respect, various interpretations of software propose a limited outlook by referring only to particular aspects of computer programs.

The paper discusses the economic nature of software and computational processes and how they should be properly represented as commodities by focusing on software IPR legislation in the US. It elaborates the similarities and differences between software applications and machines on the basis of historical evidence from the evolution of information technologies and computer science. Further, we discuss whether computer programs should enjoy IPR protection (like their physical equivalents) and which legal regime would induce the maximal degree of societal benefits, while satisfying private and public interests.

The paper also elaborates the essential issues of the distinction between ideas and expressions and the ways they are treated as intellectual property. It highlights major aspects in the debate over protection of software applications by both patents and copyrights and analyses the economic impact of the joint regime.

By highlighting the dissimilarities in the economic nature and market behaviour of ideas and expressions we point out the difficulties in drawing parallels between software and physical equivalents. Finally, we provide alternative ways to establish coherent juridical basis and legal policy of software IPRs that aim at stimulating innovation and developing the technological landscape in information technologies.     

Innovation Policy in Search of an Economic Foundation: The Case of Research Partnerships in the United States

US- owned firms account for more than 60% of worldwide computer software sales, and US capability in software tachnology is widely viewed as well ahead of that in other countries. However, the US lead cannot be expected to last. Nor are policies yet in place intended to protect exisitng advantages. Japanese firms have demonstrated their capabilities in hardware. Japanese firms have demonstrated their capabilities in hardware. Japanses exxecutives know they must develop better software in order (1) to use their own computer systems to best advantge, and (2) to sell more hardware in export markets. The next several devades will see a gradual slippage in the US position, particularly as foreign software suppliers move away from custom programming an realted services, their present focuse. A narrowing gap between US and foreign industries could prefigure a competitive challenge in software, development not unlike earlier challenges in microelectronics. Better software,. in addition, will have impacts elsewhere.In Japan's case, for example, improvements in softwarte should lead to productivity enhancements throughout the economy, improving Japan's ability to tmpete internationally.     

土地财政制度对房地产价格的影响因素研究*

本文基于动态系统GMM模型,运用Stata软件和计量经济学方法,对2009—2015年中国15个大中城市房价水平的变化趋势进行研究。结果表明：（1）地方政府依靠土地财政和房地产维持地方财政,土地财政是导致房价上涨的根本原因。（2）在经济下行的背景下,地方政府和房企共同经营土地,地方政府试图通过做大土地财政拉动地方经济。（3）中央政府选择有利于中央政府效用水平增加的经济发展方式。所以中央政府、地方政府与房企会形成经济增长联盟共同推动房价上涨。（4）房企行为对土地财政导致的高房价具有放大效应,且作用效果在东部、中西部地区呈现明显的区域差异。本文的贡献是发现了房企行为与土地财政、房价上涨之间相互作用的逻辑关系,为找到缓解房地产价格上涨的措施提供了新的可能性。     

Cutting-sdge technologies computer software: strategic industry

US- owned firms account for more than 60% of worldwide computer software sales, and US capability in software tachnology is widely viewed as well ahead of that in other countries. However, the US lead cannot be expected to last. Nor are policies yet in place intended to protect exisitng advantages. Japanese firms have demonstrated their capabilities in hardware. Japanese firms have demonstrated their capabilities in hardware. Japanses exxecutives know they must develop better software in order (1) to use their own computer systems to best advantge, and (2) to sell more hardware in export markets. The next several devades will see a gradual slippage in the US position, particularly as foreign software suppliers move away from custom programming an realted services, their present focuse. A narrowing gap between US and foreign industries could prefigure a competitive challenge in software, development not unlike earlier challenges in microelectronics. Better software,. in addition, will have impacts elsewhere.In Japan's case, for example, improvements in softwarte should lead to productivity enhancements throughout the economy, improving Japan's ability to tmpete internationally.     

Supply-constrained equilibria in economies with indexed prices

In an exchange economy prices are rigid and the prices are restricted by index functions. The indexes can be of a general type and can be different for each commodity. Indexed prices can appear in other indexes. Also considered are restrictions in terms of a general price index. Existence of a Drèze equilibrium, and particularly a supply-constrained Drèze equilibrium, is proved. The system of indexes must be solvable in terms of unconstrained prices and for the unconstrained commodities a monotonicity condition must hold.     

Price–value deviations: further evidence from input–output data of Japan

This paper subjects to empirical testing the labour theory of value using input–output data from the economy of Japan for the years 1970, 1975, 1980, 1985 and 1990. The results of the analysis show that labour values and prices of production are extremely good approximations to market prices. In fact, the proximity of prices of production to market prices is closer than that of labour values, a result which suggests that prices of production constitute more concrete centres of gravitation for market prices. Furthermore, we find that prices of production change as a result of variations in income distribution more often than not in a monotonic way and that in fewer cases they display curvatures, which may even reverse the order between prices of production and values.     

网络效应、动态定价与电脑软件的最佳升级时机

电脑软件存在的网络效应使得厂商定价策略发生一定的变化。本文运用动态最优化理论,分析电脑软件厂商的定价策略和最优更版时机。发现厂商通常会以先低于边际成本的价格定价,然后逐渐提高软件的价格,与不具有网络效应的产品的边际成本定价有一定差异;厂商在升级旧版软件时,存在最佳时机,过早或者过迟推出新版软件都将导致利润损失。     

Mixed linear-nonlinear pricing with bundling

The practice of setting marginal prices below marginal costs is so common in telecommunications offerings that it can justifiably be labeled a stylized fact. In this paper, we present a stylized model that establishes conditions under which this practice is economically efficient and profit-maximizing. A multiproduct monopolist who sells some of his goods according to a nonlinear price schedule, while selling the remaining goods at linear prices, is said to use a mixed price structure. We develop a simple model to characterize welfare- and profit-maximizing mixed prices. It is shown that standard results obtained separately for linear and nonlinear prices do not hold when mixed prices are used. In particular, the marginal price facing the largest buyer can be above or below marginal cost. The result is shown to depend on whether the goods are substitutes or complements. Implications of these results for telecommunications prices are derived, and the intuition underlying our stylized fact is developed.     

Competition and open source with perfect software compatibility

In this paper we study duopolistic competition between closed and open source software. Inspired by recent contributions on open source, we propose a two-stage game with perfect information and product differentiation, in which producers first set software quality and then determine prices (the price is zero for open source programs). We assume perfect software compatibility and model lock-in effects, a network externality component of software quality, and accumulation of experience in software use and implementation. In comparison to the monopolistic benchmark case, we argue that, in a duopoly created by the emergence of an open source program, the proprietary software producer will reduce its selling price if: (i) its network of users is larger than the open source network and its consumers are largely familiar with its program, (ii) it has a small network of unskilled consumers. On the other hand, the price of proprietary software will increase if its users form a large, but poorly-skilled network. Furthermore, we show that, in all of the above cases, the hedonic quality of proprietary software increases. Finally, by modeling experience accumulation processes through difference equations, we show that the ratio between the closed and open source programs’ opportunity costs for software learning and deployment plays a crucial role in shaping market outcomes. If open source software remains too complex and technical for unskilled or time-pressed users, a shared market solution, in which both programs are adopted, is likely to emerge. However, if opportunity costs in learning and understanding open source programs are particularly low, or at least equal to the opportunity costs of a closed-source program, then open source dominance emerges (i.e. markets tip to open source).     

THE ESTIMATION OF PRICE EFFECTS IN A SOCIAL ACCOUNTING MATRIX

The estimation of true basic prices in a Social Accounting Matrix (SAM) has long been recognized as necessary in order to achieve uniform valuation of inputs for meaningful manipulation of the input-output table contained in a SAM, in order to assess the real effects of changes in demand, etc. In practice, approximate basic prices only have normally been calculated in order to avoid matrix inversion among other things. It is equally the case that true basic prices are required if one wishes to assess the price-raising effects of commodity taxes. It is shown through an example that approximate basic prices, as conventionally calculated, are inadequate and potentially misleading for this as indeed they are for achieving uniformity of valuation. There are also problems with the present procedure for calculating true basic prices.
An alternative method of calculating true basic prices is given, which has various advantages over the existing method, and a new approximate method is also derived which appears to represent a definite improvement on the present method. For the main purpose of the paper, however, the prices of concern are those charged by producers to which the methodology equally applies.     

Length of time spent in Chapter 11 bankruptcy: a censored partial regression model

This paper investigates original issuers of high yield bonds in Chapter 11 bankruptcy to determine which factors affect the length of time spent in Chapter 11. In order to do this analysis a flexible new duration model is proposed, the censored partial regression model. This model allows consideration of the effect of some variables on the duration using a nonparametric functional form. It is found that the choice of prepackaged Chapter 11, the length of time negotiating before filling for Chapter 11, the profitability, the highly leveraged transactions, the participation on different disputes, the role of vulture funds and some institutional changes turn out to be relevant to analyse this duration.     

Product line pricing in a vertically differentiated oligopoly

Abstract This paper examines the joint pricing decision of products in a firm’s product line. When products are distinguished by a vertical characteristic, those with higher values of that characteristic will command higher prices. We investigate whether, holding the value of the characteristic constant, there is an additional price premium for products on the industry and/or the firm frontier, that is, for the products with the highest value of the characteristic in the market or in a firm’s product line. We also investigate the existence of price premia for lower‐ranked products and other product line pricing questions. Using personal computer price data, we show that prices decline with the distance from the industry and firm frontiers, even after holding absolute quality constant. We find evidence that consumer tastes for brands is stronger for the consumers of frontier products (and thus competition between firms weaker in the top end of the market). There is also evidence that a product’s price is higher if a firm offers products with the immediately faster and immediately slower computer chip (holding the total number of a firm’s offerings constant), possibly as an attempt to reduce cannibalization. Finally, a product’s price declines with the time it is offered by a firm, suggesting intertemporal price discrimination.     

Multiproduct tariffs

Necessary conditions characterizing optimal nonlinear multiproduct tariffs are derived from aggregate data about customers' responses to linear tariffs. These conditions are amenable to numerical solution with standard software by using a discrete formulation of an associated nonlinear optimization problem cast in terms of the marginal prices charged for incremental bundles. This approach avoids integrability restrictions that otherwise encumber the computations. However, this method does not ensure that customers' second-order conditions for optimality of their demands are satisfied. Some numerical examples are provided, and the extension of the method to Ramsey pricing is also demonstrated.     

Determinants of domestic and import prices in Canadian manufacturing industries

This paper examines the determinants of the prices of domestic and imported goods in the domestic market using time-series data for a broad sample of Canadian manufacturing industries. It is found that the costs of both goods are the fundamental determinants of their prices, that the pass-through of costs into prices depends on the levels of domestic and import costs, real income per capita and concentration, and that factors which increase the sensitivity of both prices to domestic costs also reduce their sensitivity to import costs. In addition, it appears that the way in which prices are determined differs between industries with low versus high advertising-sales ratios.