nep-net New Economics Papers
on Network Economics
Issue of 2006‒11‒12
fifteen papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. An Empirical Analysis of Indirect Network Effects in the Home Video Game Market By James E. Prieger; Wei-Min Hu
  2. Selling and Leasing Software with Network Externality By Jennifer Zhang; Abraham Seidmann
  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. Adverse Network Effects, Moral Hazard, and the Case of Sport-Utility Vehicles By Matthew G. Nagler
  5. Tying in Two-Sided Markets with Multi-Homing By Jay Pil Choi
  6. The Impact on Broadband Access to the Internet of the Dual Ownership of Telephone and Cable Networks By Pedro Pereira; Tiago Ribeiro
  7. Interconnection of Cable Networks: A Regulation Proposal for Broadband Internet Services By Leitao, Joao
  8. Bundling and Collusion on Communications Markets By Edmond Baranes
  9. Externalities, Social Pressures, and Political Parties By Amihai Glazer
  10. Stable and Efficient Electronic Business Networks: Key Players and the Dilemma of Peripheral Firms By Kai Suelzle
  11. Flexible Investment Decisions in the Telecommunications Industry: Case Applications using Real Options By Nicholas Economides
  12. Usage and Diffusion of Cellular Telephony, 1998-2004 By Michal Grajek; Tobias Kretschmer
  13. Dynamic Network Formation By Jack Ochs; In-Uck Park
  14. Bandwidth Allocation in Peer-to-Peer File Sharing Networks By Albert Creus Mir; Ramon Casadesus-Masanell; Andres Hervas-Drane
  15. A Structural Analysis for Consumer's Dynamic Switching Decision in the Cellular Service Industry By Jiyoung Kim

  1. By: James E. Prieger (Pepperdine University); Wei-Min Hu (University of California, Davis)
    Abstract: We explore the indirect network effect in the market for home video games. We examine the video game console makers’ strategic choice between increasing demand by lowering console price and by encouraging the growth of software variety. We also explore the existence of an applications barrier to entry in the console market, and find that there is little evidence for such a barrier. Finally, we assess the applicability of the model to out-of-sample situations, to look at whether our model and previous similar models can generalize to other markets for purposes of marketing or antitrust inquiry. We find that the model generalizes reasonably well to the Japanese market for the same generation of gaming systems, but poorly to previous generations in the US market.
    Date: 2006–10
  2. By: Jennifer Zhang (University of Toledo); Abraham Seidmann (University of Rochester)
    Abstract: Previous studies suggested that a monopoly durable goods seller can use leasing to effectively avoid the time-inconsistent problem raised by Coase Conjecture. This paper extends those previous works by examining the monopoly seller’s selling and leasing strategy for a special type of durable good --- software. We look at a software vendor that can sell (at a posted price) or lease his product where as a lesser he guarantees that the lessees will always have the latest version of the software. We address some of the specific issues of implementing the selling and/or leasing policies at the packaged software market, including the impact of network externality, upgrade compatibility, and commitment on pricing in a dynamic environment. We show that by properly defining their pricing structure, software vendors can segment the market and second-degree price discriminate the consumers. We also demonstrate how software vendors can manage the trade-offs of selling and leasing to achieve a higher profit as well as the corresponding welfare effect on the consumers.
    Keywords: Software licensing, Coarse Conjecture, Price discrimination, Network externality, Commitment, Upgrade, Compatibility, Risk.
    Date: 2006–09
  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: 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
  5. By: Jay Pil Choi (Michigan State University)
    Abstract: This paper analyzes the effects of tying arrangements on market competition and social welfare in two-sided markets when economic agents can engage in multi-homing, that is, they can participate in multiple platforms in order to reap maximal network benefits. The model shows that tying induces more consumers to multi-home and makes platform-specific exclusive content available to more consumers, which is also beneficial to content providers. As a result, tying can be welfare-enhancing if multi-homing is allowed, even in cases where its welfare impacts are negative in the absence of multi-homing. The analysis thus can have important implications for recent antitrust cases in industries where multi-homing is prevalent.
    Keywords: tying, two-sided markets, (indirect) network effects, multi-homing.
    JEL: L1 L4
    Date: 2006–09
  6. 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
  7. By: Leitao, Joao
    Abstract: In this article a brief revision of the European and Portuguese Regulatory frameworks is made, especially in terms of the interconnection of broadband internet services that are offered by cable operators. A formalization with two cable networks is presented, in order to obtain a benchmark for symmetric networks, and two scenarios: collusion and regulated market; are developed. This justifies the implementation of regulatory policies, with the establishment of caps for the interconnection tariffs, in order to assure a larger penetration rate of the broadband internet services and a bigger total welfare.
    Keywords: Regulation; Tariffs of Interconnection; Goodwill.
    JEL: L51 D40
    Date: 2006–10–16
  8. By: Edmond Baranes (University of Montpellier)
    Abstract: In this paper we examine competition between a cable operator and a telecom operator on broadband Internet service access whereas the cable operator monopolizes a TV market. We investigate the impact of bundling on the sustainability of collusion in an infinitely repeated game framework. We show that the bundling strategy of the cable operator may hinder collusion. Futhermore, we consider a setting in which the cable operator enters the broadband Internet service market using a one-way access that the incumbent possesses. We then show that when the cable operator bundles its products, a low access charge may increase the feasibility of collusion. This main result may have an important policy implication.
    Keywords: Bindling, Collusion, Differentiation.
    JEL: D43 L13 L9
    Date: 2006–10
  9. By: Amihai Glazer (Department of Economics, University of California-Irvine)
    Abstract: Members of political parties talk to each other often, and may thereby influence each other. For example, a liberal in a party of moderates may moderate his views. At the same time, the moderates in the party may become more sympathetic to liberal views. Voters in a district may favor such effects if they care about the ideology of officeholders in other districts. They may therefore prefer a candidate who affiliates with a party over an independent with the same position.
    Date: 2006–10
  10. By: Kai Suelzle (Ifo Institute for Economic Research at the University of Munich & Dresden University of Technology)
    Abstract: This paper studies a spatial model of electronic business network formation where firms build links based on a cost-benefit analysis. Benefits result from directly and indirectly connected firms in terms of knowledge flows, which are heterogeneous: a "key-player" (e.g. a firm providing an exchange platform in a business-to-business network) provides a higher level of knowledge flows than "peripheral" firms (e.g. tier 3 suppliers in a vertically differentiated industry). For intermediate cost values of link formation, stable and efficient network structures comprise only a subset of the total set of firms, excluding peripheral firms which are most distantly located to the key player. When link formation implies a certain degree of network congestion, the stable and efficient network size is smaller than in a model with bilateral decisions upon link formation between two firms.
    Keywords: Network Formation, Business-to-Business, Spatial Model
    JEL: C70 D85 L22
    Date: 2005–10
  11. By: Nicholas Economides (Stern School of Business, New York University)
    Abstract: This paper discusses how antitrust law and regulatory rules should be applied to network industries. In assessing the application of antitrust in network industries, we analyze a number of relevant features of network industries and the way in which antitrust law and regulatory rules can affect them. These relevant features include (among others) network effects, market structure, market share and profits inequality, choice of technical standards, relationship between the number of active firms and social benefits, existence of market power, leveraging of market power in complementary markets, and innovation races. We find that there are often significant differences on the effects of application of antitrust law in network and non-network industries.
    Keywords: networks, network effects, public policy, antitrust, telecommunications, technical standards, lock-in, net neutrality, Internet, Microsoft, Trinko
    JEL: L4 L5
    Date: 2006–09
  12. By: Michal Grajek (Wissenschaftszentrum Berlin (WZB) and Humboldt University); Tobias Kretschmer (Institute for Communication Economics, University of Munich and Centre for Economic Performance, LSE)
    Abstract: In this paper, we study the dynamics of usage intensity of second-generation cellular telephony over the diffusion curve. We address two specific questions: First, does information about usage intensity over time allow us to draw conclusions about the underlying drivers of technology diffusion? Second, what effect does the existence and penetration of previous generations and other networks in the same generation on network usage intensity? Using an operator-level panel covering 41 countries with quarterly data over 6 years, we find that heterogeneity among adopters dominates network effects and that different technological generations are complements in terms of usage, but substitutes in terms of subscription.
    Keywords: Cellular telephony, diffusion, usage intensity, network effects, consumer heterogeneity, fixed-mobile substitutability
    JEL: L1 L52 O38
    Date: 2006–10
  13. By: Jack Ochs; In-Uck Park
    Date: 2006–01
  14. By: Albert Creus Mir (Universitat Politecnica de Catalunya); Ramon Casadesus-Masanell (Harvard Business School); Andres Hervas-Drane (Universitat Autonoma de Barcelona)
    Abstract: We present a model of bandwidth allocation in a stylized peer-to-peer ¯le sharing net- work. Given an arbitrary population of peers composed of sharers and freeriders, where all peers interconnect to maximize their allocated bandwidth, we derive the expected band- width obtained by sharers and freeriders. We show that sharers are always better o® than freeriders and that the di®erence decreases as the size of the network grows. This paper con- stitutes a ¯rst step towards providing a general analytical foundation for resource allocation in peer-to-peer networks.
    Keywords: Peer-to-Peer, Network formation, Resource allocation, Congestion
    Date: 2006–10
  15. 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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