Biases in optimal pricing with network externalities

Access and usage externalities affect consumer welfare and behavior in regulated communications networks, but nobody has ever adjusted prices to allow for externalities with a binding revenue constraint. If we fail to account for network externalities when we set (profit-constrained) welfare-maximizing access and usage prices, are the resulting prices too high or too low? This article demonstrates that the outcome depends upon what size of customer is likely to exit the network. It determines ranges where the access price increases and the usage price decreases, as well as the reverse.     

Commitment and monopoly pricing in durable goods models

This article investigates the issue of commitment by a durable goods monopolist. Two models of the interaction between durability, recycling, and market power are compared. The two differ according to the ability of the seller to credibly commit to a given sales strategy. This article takes the standard durable goods monopoly model, extends it to allow for depreciation, and compares the monopoly markup with Swan's predicted markup for a recycled good. The difference between the two models is shown to reduce to a single parameter in the markup equation.     

Dynamic pricing models for ERP systems under network externality

Enterprise Resource Planning (ERP) systems vendors face great challenges to enhance their market position and maximize their profits. Being able to simultaneously predict the diffusion of an ERP and to determine the right price to charge to a customer is a complex task. Earlier work has demonstrated evidence of network effect in the diffusion of ERP software in industries. In light of this evidence, we investigate in this paper the benefit of a dynamic pricing strategy for ERP systems vendors in a business network governed by a quantitative diffusion model. Based on a real scenario in the automotive industry, those quantitative models are integrated into a simulation-based optimization approach to tackle the problem. Our findings are promising and establish the foundation of a powerful decision support tool for ERP systems vendors.     

R&D in markets with network externalities

This paper studies the consequences of network externalities on R&D rivalry between an incumbent firm and a potential entrant. In the model, all differences between the R&D projects chosen in market equilibrium and the socially best projects are solely due to network externalities. From a welfare perspective, the incumbent chooses a too risky and the entrant a too certain R&D project. Rothschild and Stiglitz's mean preserving spread criterion is used as a measure of risk. Adoption of a new standard is more likely in equilibrium than in the social optimum.     

Local network externalities and market segmentation

This paper models interaction between groups of agents by means of a graph where each node represents a group of agents and an arc represents bilateral interaction. It departs from the standard Katz–Shapiro framework by assuming that network benefits are restricted only amongst groups of linked agents. It shows that even if rival firms engage in Bertrand competition, this form of network externalities permits strong market segmentation in which firms divide up the market and earn positive profits. The analysis also shows that some graphs or network structures do not permit such segmentation, while for others, there are easy to interpret conditions under which market segmentation obtains in equilibrium.     

Technology revolutions in the presence of network externalities

The purpose of this paper is to investigate the effect of varying consumer preferences over technology advance and network size on the timing and frequency of new technology adoption in the presence of installed bases resulting from network externalities. The paper shows that the duration of each adopted technology and the frequency of technology adoptions depend on (a) whether (in consumers' perspectives) the network size effect is a substitute for or a complement to the quality of the technologies; (b) the degree of compatibility of new technologies with the old technology; and (c) the technology growth rate and consumer population size.     

Dynamic limit pricing a refcmulation

This paper offers a new formulation of the well known dynamic limit pricing problem developed by Darius Gaskins. Criticisms of Gaskins' model center around the lack of a game theoretic formulation and the ad hoc fringe expansion equation. In this paper, the expansion equation is based on the importance of internal finance. In the differential game, the dominant firm control price, thereby determining the available internal finance, and the maximum rate of growth, of the fringe. While the results of this study differ from those of Gaskins in a number of ways, dynamic limit pricing is found to be a feasible strategy.     

Product compatibility as a signal of quality in a market with network externalities

In this paper, I consider the compatibility decision as a signaling device of the quality of a newly introduced technology of which users are not informed. Provided that firms are located sufficiently far apart in Hotelling’s [0,1] interval, I find separating equilibria where low compatibility signals high quality. This possible separation is due to the fact that low compatibility is more advantageous to the high-quality entrant than to the low-quality entrant, since it can prevent users of the established technology from enjoying network benefits from the new technology very much.     

Vertical product differentiation,network externalities,and compatibility decisions

We analyse the subgame perfect equilibrium of a four-stage game in a model of vertical product differentiation, where the consumer’s evaluation of a product depends on its inherent quality and on its network’s size. First, two firms choose their product’s inherent quality. Then they may mutually agree on providing an adapter before competing in prices. Finally, consumers buy. We find that, despite the high quality firm’s preference for incompatibility, an adapter is always provided in equilibrium. Social welfare is greater than without an adapter and can be improved by regulating compatibility only in those cases where qualities are differentiated too much.     

Shared ownership and pricing in a network switch

We observe that many wholesale switches in automated teller machine (ATM) networks are jointly owned by their members and that this tends to occur more frequently when the wholesale industry is highly concentrated. We also observe that network switches are ‘natural monopolies’, their costs being largely fixed and their demand exhibiting substantial network externalities. Motivated by these observations, we model the competition for members between wholesale switches and the role joint ownership can play in attracting members. The model analyzes both the adoption decision (which network a bank chooses to join) and the subsequent pricing of switch and ATM services. We compare competition between two solely owned switches with competition between one solely owned and one jointly owned switch. Our analysis shows that a more concentrated structure results under the latter and that retail prices are higher. This calls into question the leniency of antitrust policy toward jointly owned structures.     

Types of firms generating network externalities and MNCs' co‐location decisions

This study identifies and examines sources of network externalities that influence MNCs to agglomerate their foreign operations in specific regions. Using data for Korean firms that invested in China, this study found that network externalities were sensitive to the types of firms constituting a regional network. It also found stronger network externalities within firms than across firms, from firms of the same nationality than from those of different nationalities, and from firms in the same industry than from those of different industries. As we defined the types of firms more precisely, distinctive curvilinear relationships between network externalities and the likelihood of co‐location emerged. Copyright © 2005 John Wiley & Sons, Ltd.     

Dynamic oligopoly pricing: Evidence from the airline industry

We explore how pricing dynamics in the European airline industry vary with the competitive environment and with customer heterogeneity. We document three main findings. First, the rate at which prices increase towards the scheduled departure date is significantly reduced in more competitive markets. Second, the sensitivity of the intertemporal slope to competition increases in the heterogeneity of the customer base. Third, ex-ante predictable advance purchase discounts account for 83 percent of within-flight dispersion in prices and for 17 percent of cross-market variation in pricing dynamics.     

Auctions with quantity externalities and endogenous supply

This paper studies the design of license auctions when the number of licenses allocated in the auction determines structure of the post-auction market. I first show that a sequence of conditional reserve prices that specify minimum acceptable bid at each supply level can be used to determine supply endogenously. Then I construct a static auction called multi-dimensional uniform-price auction and a dynamic auction called Walrasian clock auction that allow the auctioneer to condition reserve price on supply and allow bidders to condition bids on supply. I show that both proposed auctions can implement the efficient market structure that maximizes total surplus in the post-auction market in a dominant strategy equilibrium. I next characterize the optimal auction and show that the two proposed auctions can yield the optimal revenue under a sequence of optimal reserve prices.     

Toward measuring monopoly power

Some implications of Hyde and Perloff's paper on whether monopoly power can be measured are considered. It is concluded that measuring monopoly power requires a long-run view, with a focus on the implications of product differentiation, and a reliance on accounting data.     

Merger externalities in oligopolistic markets

We evaluate the external effects of 183 large mergers at the market level by assessing the impact on the main competitors of the merging firms. Using synthetic control groups and difference in difference estimation, we find that the return on assets of rival firms increases significantly after a merger. The size of the effect varies strongly with market characteristics and the intensity of competition.     

Does monopoly mean stagnation?

Through a case study of the telecommunications environment in France, the President of the European Conference of PTT Administrations sets out his views on monopoly and deregulation. He challenges the view that a telecommunications monopoly is an obstacle to progress, arguing that each country must evolve the system that is best suited to its economic, cultural and sociopoltical contexts.     

The social costs of monopoly?

The essay recounts the contributions of earlier economists to the discussion of the social costs of monopoly. They largely duplicate more contemporary contributions.     

“Lock-in” vs. “critical masses” — Industrial change under network externalities

Where increasing returns to adoption play a role in the diffusion of a new technology, technological “lock-in” is now often claimed to occur. However, this result, and the modeling approach that produces it, are problematic. Further innovations could never have a chance of disseminating, if “lock-in” had occurred in the diffusion process of earlier innovations. Yet, in reality, industrial change does not come to a halt. The paper offers a discussion of the apparent paradox. From an alternative modeling approach conditions are derived under which a newly introduced technology can successfully disseminate in the market despite existing network externalities.     

The political economy of monopoly and competition: A critique of monopoly and stagnation theory

This paper examines critically the Kaleckian theory of monopoly capitalism proposed by Cowling (1982). The supply side of the model is shown to be incapable of providing an aggregate degree of monopoly and the neglect of inter-sectoral competition is highlighted. On the demand side, there is little indication of the source of stagnationary tendencies; it is the emphasis on collusion over conflict which underpins stagnation. The model is characterised by its emphasis on distribution and exchange at the expense of production relations, and is an inadequate representation of ‘monopoly capitalism’.