nep-dcm New Economics Papers
on Discrete Choice Models
Issue of 2006‒11‒12
five papers chosen by
Philip Yu
Hong Kong University

  1. Adverse Network Effects, Moral Hazard, and the Case of Sport-Utility Vehicles By Matthew G. Nagler
  2. The Impact on Broadband Access to the Internet of the Dual Ownership of Telephone and Cable Networks By Pedro Pereira; Tiago Ribeiro
  3. Network Effects, Switching Costs, and Underlying Preferences in Operating Systems for Servers: A Case of Linux vs. Windows By Seung-Hyun Hong; Leonardo Rezende
  4. Simulation of Merger in Mobile Telephony in Portugal By Lukasz Grzybowski; Pedro Pereira
  5. A Structural Analysis for Consumer's Dynamic Switching Decision in the Cellular Service Industry By Jiyoung Kim

  1. By: Matthew G. Nagler (Lehman College, The City University of New York)
    Abstract: The paper examines a class of phenomena that combine adverse network effects with moral hazard, using the motor vehicle market as an example to develop and illustrate the key concepts. It is hypothesized that consumers behave as if there is a network externality with respect to vehicle size: the more large vehicles there are on the roads, the greater a consumer’s propensity to seek protection from them by driving a large vehicle herself. One consequence of this is that motor vehicle manufacturers are discouraged from making large vehicles less hazardous to other motorists. The paper measures the network effect and consequent moral hazard using disaggregate data on choice of vehicle type and related household characteristics, combined with a state-level measure of the incidence of traffic fatalities. The results show that for each 1 million light trucks that replace cars, between 961 and 1,812 would-be car buyers decide to buy a light truck instead, in reaction to the increased risk of death posed by the incremental light trucks. This network effect, when run in reverse, creates egregious incentives for vehicle manufacturers: for every life saved due to safety innovations that make light trucks less deadly to other motorists, manufacturers can expect to sell about 31 fewer light trucks.
    Keywords: Network Externalities, Moral Hazard, Highway Safety, Discrete Choice Models
    JEL: D00 D12 K10
    Date: 2005–10
  2. By: Pedro Pereira (Autoridade da Concorrencia, Portugal); Tiago Ribeiro (Indera)
    Abstract: In Portugal, the telecommunications incumbent o®ers broadband access to the Inter- net, both through digital subscriber line and cable modem. In this article, we estimate the impact on broadband access to the Internet of the structural separation of these two businesses. We use a panel of consumer level data and a discrete choice model to estimate the price elasticities of demand and the marginal costs of broadband access to the Internet. Based on these estimates, we simulate the e®ect on prices and social welfare of the structural separation. Our results indicate that the structural separation would lead to substantial price reductions. For broadband clients, on average, each household would save 3:37 euros per month, or 14% of the current price levels. Overall, on average, each household would save 2:73 euros per month, or 14% of the current price levels. We test the robustness of our results in terms of: (i) the estimates of the demand elasticities, (ii) the strategic behavior of the ¯rms, and (iii) the market share estimates. There is no evidence of collusion.
    Keywords: Broadband, Structural Separation, Prices
    JEL: L25 L51 L96
    Date: 2006–08
  3. By: Seung-Hyun Hong (University of Illinois); Leonardo Rezende (PUC-Rio and University of Illinois)
    Abstract: We seek to investigate to what extent network effects and switching costs affect the decision to adopt Linux or Windows as the operating system for computer servers. To this end, we use detailed survey data of over 100,000 establishments in the United States. To account for unobserved preferences for either operating system, we employ recently developed dynamic discrete choice panel data methods (Arellano and Carrasco 2003). The results from our empirical analysis suggest that among network effects, switching costs, and unobserved preferences, the last two are important factors in the market for operating systems for servers. We find that switching costs are significant, but can be severely overestimated by methods that do not account for unobserved heterogeneity in establishment-specific tastes for operating systems. We also find that once taste heterogeneity is taken into account, network effects are not significant.
    Date: 2006–09
  4. By: Lukasz Grzybowski (University of Alicante); Pedro Pereira (Autoridade da Concorrencia, Portugal)
    Abstract: This article assesses the unilateral eects of a merger in the Portuguese mobile telephony market. We use aggregate quarterly data from 1999 to 2005 and a nested logit model to estimate the price elasticities of demand and the marginal costs of subscription to mobile services. We nd that mobile services provided by the rms in the market are close substitutes. Based on these estimates, we simulate the eects of the merger. The merger may result in substantial price increases, even in the presence of large cost eciencies.
    Keywords: mobile telephony, merger simulation, network eects, lock in, nested logit
    JEL: L13 L43 L93
    Date: 2006–10
  5. By: Jiyoung Kim (University of Wisconsin-Madison)
    Abstract: This paper develops an empirical framework to analyze consumer’s dynamic switching decision in the cellular service industry. It first incorporates the sequential problem of quantity, plan and firm subscription choice in the presence of switching costs into a dynamic structural model, which allows for fully heterogeneous consumers and multiple switching possibilities across networks. The model is estimated using the data set on the number of switching consumers and the evolution of observed plan/firm characteristics over time. Based on the BLP-style estimation methods, we combine a nested technique that uses parametric assumptions with the structural estimation algorithm. The magnitude of switching costs is estimated and the impact of number portability is evaluated. A dynamic model with restricted number of switching is likely to underestimate the switching costs. I find that future expectations affect consumers' optimal timing of switching. Change in the variety of optional plans and plan qualities play a great role in the consumer switching decision. I also find that the pattern of switching rates which we observed after number portability is attributed more to decrease in the prices and increase in the product qualities than decrease in the magnitude of switching costs.
    Date: 2006–10

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