nep-ict New Economics Papers
on Information and Communication Technologies
Issue of 2016‒10‒09
five papers chosen by
Walter Frisch
Universität Wien

  1. Broadband Mergers and Dynamic Bargaining: An Application to Netflix By Daniel Goetz
  2. Does Public Competition Crowd Out Private Investment? Evidence from Municipal Provision of Internet Access By Kyle Wilson;
  3. Information Management in Smart Grids - the need for decentralized governance approaches By Marius Buchmann
  4. Assessing and Quantifying Local Network Effects in an Online Dating Market By Gordon Burtch; Jui Ramaprasad
  5. Attack-Aware Cyber Insurance of Interdependent Computer Networks By Rui Zhang; Quanyan Zhu

  1. By: Daniel Goetz (Princeton University, Department of Economics, Fisher Hall, Princeton, NJ, 08540)
    Abstract: I measure how mergers in the market for broadband internet service affect short-run welfare. Mergers between internet service providers (ISPs) with non-overlapping markets may decrease welfare by increasing ISP bargaining leverage against content providers. However, study of this welfare channel has been stymied by a lack of data on interconnection fees between content and internet service providers. I estimate an industry model of demand, plan choice, pricing and interconnection bargaining using data on plan prices, consumer choice sets and bargaining delays between major U.S ISPs and the leading purveyor of streaming video content, Netflix. Intuitively, if delaying agreement over interconnection degrades quality of service to subscribers, then the opportunity cost of lost subscriptions identifies the fee. To map disagreement times and ISP competition into interconnection fees, I develop a multilateral dynamic bargaining model with asymmetric information. ISPs make take-it-or-leave it offers to learn about Netflix's benefit from interconnection, while simultaneously competing for subscribers who value Netflix quality of service. I structurally estimate the model and recover fixed interconnection fees ranging from 44 to 69 million USD. I find that a proposed merger between TimeWarner and Comcast that was challenged by the Federal Communications Commission would have slightly raised interconnection fees and bargaining length, reducing consumer welfare by 1.9 percent.
    Keywords: mergers; streaming video; dynamic games of incomplete information; two-sided markets;
    JEL: C7 L41 L96
    Date: 2016–09
  2. By: Kyle Wilson (University of Arizona, Department of Economics, McClelland Hall 401, PO Box 210108, Tucson, AZ 85721-0108);
    Abstract: Government investment in infrastructure may crowd out private investment that would have otherwise occurred. But, the threat of government intervention may also induce private firms to invest preemptively in infrastructure, in order to maintain their market position. This leaves the net effect of public competition on private investment unclear. This paper investigates the tension between these competing effects by providing evidence from the setting of internet service provision. Using household survey data and a novel data set of internet plan characteristics, I provide nationwide estimates of demand for internet technologies. I then use these results to estimate a dynamic oligopoly model of private and public internet service providers’ entry and technology adoption decisions, where private firms are driven by profits and municipalities by some (as yet) unknown combination of profits and consumer welfare. Finally, I simulate firms’ actions under a ban on public provision and find evidence that public competition partially, but not completely, crowds out private investment. Ultimately, I find that a ban on municipal provision in 30 states would result in a loss in consumer welfare of $1.11 billion over 20 years.
    Keywords: broadband, demand, dynamic, public, crowding out access
    JEL: L13 L21 L33 L96 H32 H44
    Date: 2016–10
  3. By: Marius Buchmann
    Abstract: Information management secures the efficient exchange of data (e.g. from smart metering) in smart grids. Currently, national as well as regional information management systems are being developed. We discuss how the size of an information management system, i.e. the region covered by and the number of users connected to it, has an influence on the level of innovation in the process of the data exchange. Based on insights from the theory of fiscal federalism we argue that neither of the extremes of national (central) and decentralized governance approaches for information management will be optimal. We discuss how the market can determine the optimal degree of decentralization. If information management shall enable smart grids, then we show that the network operator needs to be able to incentivize network users to join and participate in an information management system to internalize externalities. Then, the size of the governance of information management systems will be linked to the network areas on the distribution grid level.
    Keywords: Smart Grid, Information Management, data exchange, fiscal federalism, size
    JEL: L12 L51 L94
    Date: 2016–09
  4. By: Gordon Burtch (University of Minnesota, Carlson School of Management, Information & Decision Sciences Department, 321 19th Ave. S., Minneapolis, MN 55408, USA); Jui Ramaprasad (McGill University, Desautels Faculty of Management, 1001 Rue Sherbrooke O, Montréal, QC H3A 1G5, Canada)
    Abstract: We empirically examine and quantify network effects on a large online dating platform in Brazil. We consider the effects of a seeding intervention by the platform operator, wherein it acquired its primary competitor and subsequently imported the competitor’s 150,000 user accounts over a 3-day period. The acquisition thus constitutes a large exogenous shock the composition of the acquiring platform’s user base. We estimate the effect of the shock on the rate of subsequent enrollments and exits amongst heterosexual users across 120 cities. Bearing in mind that the purchased users were exclusively heterosexual, we employ a difference-in-differences specification in which homosexual enrollment and exit rates serve as plausible controls. Our estimates indicate that the treatment increased the rates of both enrollment and exit, for both genders, with a net positive effect that translated to a 22% increase in short-term revenue for the platform. Further, we find that the response amongst male users was significantly stronger. When we consider that female participation was being fully subsidized by the acquiring platform, this result is consistent with the idea that subsidies and seeding strategies are substitutes, rather than complements. Finally, we explore nuances of the observed effects, quantifying local features. In particular, we show that the treatment effect varied significantly, depending on age differences and the degree of co-location between new and existing users.
    Keywords: online dating, network effects, natural experiment, differences in differences,
    JEL: L14
    Date: 2016–08
  5. By: Rui Zhang (Department of Electrical and Computer Engineering, Tandon School of Engineering, New York University, USA); Quanyan Zhu (Department of Electrical and Computer Engineering, Tandon School of Engineering, New York University, USA)
    Abstract: Cyber insurance is a valuable approach to mitigate further the cyber risk and its loss in addition to the deployment of technological cyber defense solutions such as intrusion detection systems and firewalls. An effective cyber insurance policy can reduce the number of successful cyber attacks by incentivizing the adoption of preventative measures and the implementation of best practices of the users. To study cyber insurance in a holistic manner, we first establish a bi-level game-theoretic model that nests a zero-sum game in a moral-hazard type of principal-agent game to capture complex interactions between a user, an attacker, and the insurer. The game framework provides an integrative view of the cyber insurance and enables a systematic design of incentive compatible and attack-aware insurance policy. The framework is further extended to study a network of users and their risk interdependencies. We completely characterize the equilibrium solutions of the bi-level game. Our analytical results provide a fundamental limit on insurability, predict the Peltzman effect, and reveal the principles of zero operating profit and the linear insurance policy of the insurer. We provide analytical results and numerical experiments to corroborate the analytical results and demonstrate the network effects as a result of the strategic interactions among three types of players.
    Keywords: Cyber Insurance, Network Security, Moral Hazard, Information Asymmetry, Network Effects, Security Games, Mechanism Design
    JEL: G22 D80 D86
    Date: 2016–09

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