Competition with Congestible Networks

We analyse competition between two network providers when the quality of each network depends negatively on the number of customers connected to that network. With respect to price competition we provide a sufficient condition for the existence of a unique pure strategy Nash equilibrium. Comparative statics show that as the congestion effect gets stronger quantities will decrease and prices increase, under both Bertrand and Cournot competition. In an example with endogenous capacities it turns out that equilibrium capacities are at first increasing and then decreasing in the strength of congestion. Furthermore, capacities are higher under Cournot competition. Welfare comparisons between Bertrand and Cournot competition are unambiguous for fixed capacities, but may turn around for endogenous capacities.     

Vertical Integration and Market Foreclosure with Convex Downstream Costs

Received December 14, 2000; revised version received July 16, 2001     

The Impact of Upfront Payments on Assortment Decisions in Retailing

There is a contentious debate about the exclusionary effects of upfront payments to be made by manufacturers to place their products on retailers’ shelves. Analyzing a two-stage bargaining process with one downstream retailer and a pool of upstream manufacturers, we find that upfront payments lead to a smaller assortment if the retailer’s bargaining power is high enough and the suppliers’ products are close substitutes.     

Mobile phone termination charges with asymmetric regulation

We model competition between two unregulated mobile phone companies with price-elastic demand and less than full market coverage. We also assume that there is a regulated full-coverage fixed network. In order to induce stronger competition, mobile companies could have an incentive to raise their reciprocal mobile-to-mobile access charges above the marginal costs of termination. Stronger competition leads to an increase of the mobiles’ market shares, with the advantage that (genuine) network effects are strengthened. Therefore, ‘collusion’ may well be in line with social welfare.      

Complexity and Progressivity in Income Tax Design: Deductions for Work-Related Expenses

We analyze optimal income taxes with deductions for work-related or consumptive goods. We consider two cases. In the first case (called a complex tax system) the tax authorities can exactly distinguish between consumptive and work-related expenditures. In the second case (called a simple tax system) this distinction is not exact. Assuming additively separable utility functions, we show that work-related expenditures should be fully deductible in the first case while deduction rates should be less than 100 percent in the second case. Under further simplifying assumptions, we also show that the simple system can be characterized by higher tax burdens on low income earners and less redistribution.     

Quality distortions in vertical relations

This paper examines how delivery tariffs and private quality standards are determined in vertical relations that are subject to asymmetric information. We consider an infinitely repeated game where an upstream firm sells a product to a downstream firm. In each period, the firms negotiate a delivery contract comprising the quality of the good as well as a non-linear tariff. Assuming asymmetric information about the actual quality of the product and focusing on incentive compatible contracts, we show that from the firms’ perspective delivery contracts lead to more efficient contracts and thus higher overall profits the lower the firms’ outside options, i.e. the higher their mutual dependency. Buyer power driven by a reduced outside option of the upstream firm enhances the efficiency of vertical relations, while buyer power due to an improved outside option of the downstream firm implies less efficient outcomes.     

On the economics of Internet peering

We discuss economic rationales behind peering decisions in the Internet. In the first part of the paper we analyze the decision about a bilateral peering agreement between two commercial Internet service providers (ISPs) who are in Cournot competition. In the second part we discuss multilateral peering between commercial ISPs and an academic research network (ARN). The latter is organized as a club of academic institutions who share the cost of their network. It is discussed whether peering threatens the existence of the ARN and under what circumstances a commercial ISP would want to use strategic pricing to win all ARN‐members as customers. This revised version was published online in June 2006 with corrections to the Cover Date.     

Explaining cross-supplies

Cross-supplies describe the phenomenon that two or more firms in the same industry supply each other with their final products. A prominent example is the cooperation in the European flat-glass industry, which was recently criticized by the European Commission. In a simple model we attempt to explain what incentives firms may have to use cross-supplies (instead of producing the goods themselves) and what welfare effects cross-supplies have if they are used. Contrary to the ruling of the European Commission we find that cross-supplies improve welfare whenever they are employed. Furthermore, for a large range of parameters, they even benefit consumers.     

Collusive intra-industry trade in identical commodities

Collusive Intra-Industry Trade in Identical Commodities. — A homogenous-goods Cournot model with two countries and two firms is analyzed. Firms may collude by monopolizing their domestic markets, but they may also engage in collusive intra-industry trade. It turns out that, though such trade is costly because of transportation costs, firms might indeed trade since this enlarges the scope of successful collusion. Hence, intra-industry trade in homogenous goods is not a reliable indicator of competition.     

Price Caps,Rate of Return Constraints and Universal Service Obligations

This paper evaluates the effects of modifying price cap regulation when firms are allowed to use non-linear tariffs. We consider a stylized network industry and analyze price cap regulation combined with rate of return regulation and with a universal service obligation. While both modifications can increase aggregate welfare by reducing the pricing distortions under price cap regulation, a universal service obligation is welfare superior if the firms profits and the size of its network are held constant.