One‐Way Compatibility,Two‐Way Compatibility and Entry in Network Industries

We study the strategic choice of compatibility between two initially incompatible network goods in a two‐stage game played by an incumbent and an entrant firm. Compatibility may be achieved by means of a converter. We derive a number of results under different assumptions about the nature of the converter (one‐way vs two‐way), the existence of property rights and the possibility of side payments. With incompatibility, entry deterrence occurs for sufficiently strong network effects. In the case of a two‐way converter, which can only be supplied by the incumbent, incompatibility will result in equilibrium unless side payments are allowed and the network externalities are sufficiently low. When both firms can build a one‐way converter and there are no property rights on the necessary technical specifications, the unique equilibrium involves full compatibility. Finally, when each firm has property rights on its technical specifications, full incompatibility is observed at the equilibrium with no side payments; when these are allowed the entrant sells access to its network to the incumbent which refuses to do the same and asymmetric one‐way compatibility results in equilibrium.     

Robust services: People or processes?

Service systems are inherently subject to variability, whether through customers, service providers, suppliers, or unexpected events. Yet, customers demand excellence and consistency regardless of this variability. In general, there are two ways to handle this variability: with people or with processes. We use the concept of robustness to describe these two approaches, address when one or the other might be appropriate, and discuss how and why one might transition from one approach to the other. Robust people and robust processes within a system can inform and build upon one another in a cycle that mirrors that of continuous improvement. Investing in this cycle can help an organization move toward a system that relies more on robust processes and less on hiring and training robust people, allowing the organization to be scalable while simultaneously creating new opportunities for incumbent robust people.     

Big content providers weighing on non-neutrality?

There is a trend for big content providers such as Netflix and YouTube to give grades to Internet Service Providers (ISPs), to incentivize those ISPs to improve at least the quality offered to their service. We design in this paper a model analyzing ISPs’ optimal allocation strategies in a competitive context and in front of quality-sensitive users. We show that the optimal strategy is non-neutral, that is, it does not allocate bandwidth proportionally to the traffic share of content providers. On the other hand, we show that non-neutrality does not benefit ISPs but is surprisingly favorable to the perceived quality for users.

     

Internet service provision and content services: paid peering and competition between internet providers

We consider the relationship of Internet service providers (ISP) and content service providers (CP) in the Internet ecosystem. Currently, the position of ISPs is challenged by the emergence of powerful content service providers, especially with the spreading of bandwidth-demanding video services. The further investment in the network capacity may be hindered by prevailing business models that largely exclude the ISPs from sharing in the major cash flows resulting from content provision. We develop modeling tools for evaluation of business models of ISPs and present results of an analysis of two models with the potential for the generation of additional cash flows for ISP: paid content peering and service differentiation. Firstly, we show that under certain conditions on the cost structure and the level of demand elasticity and uncertainty, it can be profitable for a powerful content provider to resort to paid content peering, thus transferring to the ISP a part of his content provision revenue. The resulting business model may provide substantial benefits to all major participants in this ecosystem: network providers, content and service providers and end users. After this we consider competition in the Internet provision sector and show that - also in this case - the paid content peering can help ISPs to expand the network capacity and at the same time increase profits of content providers. The end users benefit from the lower prices for content services. Finally, we consider the situation when an ISP differentiates the service offer by engaging in content provision, thus entering in direct competition with content providers.     

Governance mechanisms for mobile service innovation in value networks

Service innovation often requires multiple organizations to work together in complex, dynamic networks. Existing literature shows that mechanisms like trust, power and contracts govern activities in organizational networks. Scholars rarely study how such a mix of mechanisms evolves over time, especially not in relation to different stages of service innovation. This paper connects a phasing model on service innovation to concepts of inter-organizational governance in value networks, by examining what governance mechanisms are in use during service development, implementation and commercialization. This study analyzes an international survey among operators, content providers and application developers in the Mobile Internet services domain, which is noted for its complex inter-organizational networks. The findings suggest that power-based governance is in use in the early stages of developing service concepts and technologies, while trust-based governance is in use during implementation, roll-out and commercialization. Contract-based governance is most common during implementation and roll-out.     

Pricing Internet access in the presence of user loyalty

Socio-economic aspects of future communication networks such as pricing models for network providers, network neutrality, and Quality of Experience (QoE) are becoming more and more important as the convergence of networks is in progress. All the above areas share a common interest: the deeper understanding of user behavior. In this paper, as a first step towards a more realistic user model, we investigate customer loyalty and its impact on the pricing competition of Internet Service Providers (ISPs) who sell Internet access to end-users. The main contribution of this paper is twofold. First, we analyze the impact of user loyalty with game-theoretical means motivated by the Bertrand game. We show how loyalty introduces a new equilibrium in a repeated game setting resulting in the cooperation of ISPs. Furthermore, we investigate the case of a differentiated customer population by introducing dual reservation values, and show how it leads to new, pure strategy Nash equilibria indicating that ISPs should make the most out of their respective loyal user base. Second, we construct two novel models for customer loyalty incorporating two important aspects of the users’ purchasing decisions: price sensitivity and inherent uncertainty. We evaluate the impact of user loyalty through these models by extensive simulations in a number of relevant scenarios. In particular, we show how the higher level of loyalty in the user population leads to larger profits for ISPs. We argue that our findings can motivate network researchers to incorporate a finer-grained user behavior model in their investigations on pricing models of network services and other socio-economic issues.     

Private peering,transit and traffic diversion

Private peering refers to settlement-free connectivity agreements between Internet Service Providers meant to interconnect their networks by-passing congested National Access Points. We explore the incentives for bilateral peering with particular emphasis on traffic diversion. A private peering agreement between two providers improves the quality of both and would divert traffic from third parties. This provides an incentive for peering. A three-player model is introduced and analyzed. Complication introduced by price competition and heterogeneous consumers are also studied.     

Competitive resource sharing by Internet Service Providers

We look at non-cooperative resource sharing (a generalization of paid peering) among Internet Service Providers (ISPs), where individually rational providers who not only compete for customers but also participate in resource sharing, in order to utilize underlying complementarities in cost structures. In particular, we are interested in the following question: would simple, easy-to-implement access pricing mechanisms guarantee ex-ante participation in resource sharing even by providers who, subsequent to deciding participation, engage in competition for customers, set access prices and make routing decisions? We first show that, in presence of linear access pricing, participation in the sharing arrangement is possible, but not guaranteed. We then show that a two-part tariff guarantees participation in the sharing agreement—this is not obvious given that resource sharing alters customer bases. We also show that our mechanism is robust to providers mis-reporting their types. Next, we show that, though both providers choose strictly positive customer bases, one of the them has no incentive to utilize the resources of the other and effectively acts as a resource supplier, whereas the other provider utilizes both resources. Finally, we show the robustness of our results to different cost structure and game forms, and provide some policy implications. Our results have significant implications not only for policy design since they suggest that paid peering should be encouraged but also for design of realistic traffic engineering protocols.     

The Microsoft Antitrust Case

This paper analyzes the law and economics of United States v. Microsoft, a landmark case of antitrust intervention in network industries. The United States Department of Justice and 19 States sued Microsoft alleging (i) that it monopolized the market for operating systems of personal computers and took anti-competitive actions to illegally maintain its monopoly; (ii) that it attempted to monopolize the market for Internet browsers because such browsers would create competition for operating systems; (iii) that it bundled its browser (Internet Explorer) with Windows; and that it engaged in a number of other anti-competitive exclusionary arrangements with computer manufacturers, Internet service providers, and content providers attempting to thwart the distribution of Netscapes browser. The District Court Judge found in most points for the plaintiffs and ordered the breakup of Microsoft into two companies, one with all the operating systems software, and one with all other products of the company. The District Court also imposed a number of severe restrictions on the business conduct of Microsoft. We analyze the economic issues related to liability. We also analyze the applicability and effectiveness of the remedies imposed by the District Court and contrast them with other potential remedies.     

Spam and Beyond: An Information-Economic Analysis of Unwanted Commercial Messages

The phenomenon of unwanted commercial messages (UCM), including e-mail spam and emerging forms that target other Internet communications facilities, is analyzed from an information-economics perspective. UCM traffic pays off for its senders when it is noticed and consumed by Internet users; the industry is, therefore, dependent on a common-pool resource that is accessed through an information asset. An analytical model of the industry is derived and solved computationally, and two dimensions of information quality held by the senders of UCM traffic are manipulated in the model. It is shown that such manipulations can moderate over time both the number of UCM campaigns undertaken and the amount of Internet bandwidth consumed by UCM. Manipulations of the information-quality dimensions affected by e-mail filtering reduce the amount of traffic that penetrates an Internet user's attention space but increase the amount of Internet bandwidth consumed. This is consistent with data reported by e-mail security providers as filters have been deployed. It is also shown that both public and private entities have adopted policies and practices with unintentional informational side effects. These effects may have led to more rather than less, spam e-mail traffic. It is concluded that the lessons learned from the case of e-mail spam can be applied to the development of policies and practices for mitigating newer, emerging forms of UCM, including versions targeting instant-messaging systems and Web logs.     

Evolution of the Payment Systems of London Clearing Banks

The London Clearing Banks (LCBs) have successfully used payment systems to establish a customer franchise, through which they have gained cheap retail deposits and provided lending and other services. Yet they have failed to price the service rationally. Market growth has dramatically increased the volume of payments, exacerbating the cost problem. To counter this, the LCBs have introduced additional payment mechanisms such as credit cards and Bankers' Automated Clearing Service (BACS); are introducing electronic fund transfer at point of sale (EFTPOS); and are further automating the existing cash and cheque-based system. The development of the clearing house, BA CS and EFTPOS demonstrates how payment systems impose co-operative policies to facilitate the transfer of funds and reduce costs, but such enforced co-operation ten& to lead to perfect competition, with uniform pricing policies. Competitors are in a strong position to operate more efficient and less expensive payments media for their customers. The dilemma facing the LCBs is therefore how to match this challenge and maintain their market position through further investment in payments technology, while maintaining their existing less efficient and more expensive payments media.     

Consumer privacy and the future of data-based innovation and marketing

Digitization makes it easier for firms to build their innovation and marketing efforts around consumers' personal data. In this research, we employ a privacy perspective based on contextual integrity to examine how such practices can trigger privacy concerns. We propose that small entrepreneurial firms are often at a particular disadvantage compared to large incumbent firms. At the same time, we also highlight that there are several strategies firms can use to mitigate privacy concerns and that in some circumstances, privacy concerns may also exert positive effects on data-driven marketing by stimulating privacy innovation and providing a source of competitive advantage.     

Pricing of Payment Services: A Comparative Analysis of Paper-based Banking and Electronic Banking

This paper aims at comparing paper-based banking and electronic banking in terms of cost-efficiency and pricing. The focus is primarily on giro payments made manually by mail and electronically via the Internet, but also by cash over the counter. The paper presents principles of efficient pricing in terms of production fees and capacity fees. It also demonstrates that the current pricing of payment services in Norway and Sweden is far away from these principles as production fees are set below marginal costs while capacity fees are in many cases above capacity costs. Such deviations may stimulate customers to an excess demand for electronic payments while paper-based payments will be depressed.     

Competition In Mediation Services: Modeling the Role of Expertise,Satisfaction, and Switching Costs

This article analyzes competition among mediation service providers that match clients and vendors in a horizontally differentiated market. This is an issue that is important for decision support of mediators in determining pricing and service strategies. We present a simulation model to simultaneously represent search as well as the behaviors of clients, vendors, and multiple competing mediators. Among our findings: intermediaries find it optimal to offer registration fee incentives and derive revenues from transaction fees from successful matches; as switching costs increase, incumbent utilities increase and entrant utilities decrease; expertise, modeled as the ability of mediators to assess vendor attributes accurately, is a powerful competitive weapon for entrants to erode the incumbent intermediary's first mover advantage. On the other hand, client satisfaction is an instrument for an incumbent intermediary to deter entrance by competitors.     

Selective Price Cuts and Price Discrimination Bans in Network Industries

In order to encourage competition in network-based industries such as telecommunications, some jurisdictions have adopted regulatory rules which prevent the incumbent service provider from selectively cutting prices in response to market entry. Given such bans on price discrimination, the incumbent cannot react to competition by selectively adjusting prices, based on the competitive situation in a given market, but has to maintain the same price across all markets. This paper analyses the welfare effects of such a rule for both one-way networks (access model) and two-way networks (interconnection model) when consumers have switching costs. We find that, even though bans on price discrimination can induce inefficient entry for a range of parameter constellations, there are also cases where they induce efficient market entry. This is the more likely to be the case the higher the fixed costs of entry.     

Measuring service experience: a utility-based heuristic model

This research aims to construct a model to evaluate service experience. We develop a novel model for service experience by incorporating positive and negative dimensions. We demonstrate that greater utility from experience results in greater value of service experience. We also discovered negative dimensions are the key reason; especially waiting time. We separated five groups to help firms explore deeper insights from various dimensions. The value of service experience in group of middle range has the greater contrast between positive and negative dimensions than the other groups. Service providers can obtain customer perception to adjust or revise the service components.     

The correlations between price cuts/changes and fee sensitivity on the choice of mobile phone service provider

This study adopts fee thresholds to measure users' fee sensitivity and employs a two-step logit model to predict a phone user's probability of choosing a certain service provider. The results indicate that the choice probability can be overestimated if the reference fee effect is not taken into consideration. Furthermore, the lower calling fee image and perceptions shaped by the telecommunications service provider can increase the probability of it being chosen. Users' benefit (saving money) perceptions also reveal a significant difference. In this regard, price promotion effects may not necessarily be successful for every service provider at the time. Service providers with a larger base of benefit perception users have a relative advantage in price-cutting activities. The characteristics of users in the low-loss perception (insensitive to an expensive fee) group are younger, female, and college-educated. Service providers could focus on this segmented market and implement a non-price strategy in order to attract more users. This study may be useful to mobile phone service providers in terms of price-setting policy and image management.     

Wettbewerbspolitik in der digitalen Wirtschaft

Digital content and services providers like Alphabet (formerly Google) or Facebook have become an indispensable part of our everyday lives and are among the highest valued firms in the economy as a whole. Most digital markets are characterized by direct and indirect network effects and therefore also by so-called two-sided platforms. To date it is not clear to how much market power these firms actually possess, which is a prerequisite for a possible policy intervention. The authors discuss measuring market power within the existing European legal framework and propose new legal rules in the field of digital markets. As the limitations of current instruments such as the SSNIP test point out, new approaches for the analysis of markets in the context of Internet-based platforms are necessary. The authors prefer modifying competition law to sector-specific regulations of internet-based businesses. They also discuss the implications that the use of big data has on competition policy. The author Günter Knieps focusses on the network evolution of the future all-IP Internet, which should neither be disturbed by regulatory technology policy nor by network neutrality regulation.     

Smart Card-Based Electronic Card Payment Systems in the Transportation Industry

Many products and services will soon be (or are already being) sold over the Internet or other networks. Paying for these with standard methods of payments, such as cash, checks, credit card, or debit card, may be ineffective or inefficient. For such cases, electronic card payment systems are more appropriate. Several things need to be considered when investigating electronic card payment system options, including: customer needs and benefits, developmental and operational cost, corporate benefits, continually changing technologies, critical mass of customers, security, standards of payment systems, and customer perception and comfort with new technologies. In this article, we analyze how smart card-based systems are used in mass transportation. Managers in mass transportation face the following questions: Do you develop your own electronic card payment system, do you wait for multifunctional cards that will be accepted across many industries to provide the functionality required in your market, or do you do nothing. The discussion here concentrates mainly on the transportation industry, where the transactions and payments are made on local area networks.     

Convergence marketing

The authors discuss two enduring lessons of the Internet revolution: The first is that new technologies do not replace the old. They live side by side. They converge. The second is that people are complex, combining new technology and behaviors with enduring human needs. Like the mythical centaur, they run on the fleet hooves of the new technology but still carry the same human heart. These lessons of convergence shaped the unfolding of Internet technology—contributing to the decline of dot-coms and the missed opportunities of incumbent firms—and these lessons will shape the technological revolutions to come. In this article, Jerry Wind and Vijay Mahajan examine the implications of these lessons for marketing and business strategy in five specific areas of convergence—customerization (customization of marketing and product or service offering), community, channels, competitive value and choice tools. In each of these areas the greatest opportunities may be in strategies that emphasize convergence of old and new, online and offline, traditional and revolutionary.