nep-tid New Economics Papers
on Technology and Industrial Dynamics
Issue of 2006‒08‒26
twelve papers chosen by
Roberto Fontana
Universita Bocconi

  1. Innovation and Firm Growth in High-Tech Sectors: A Quantile Regression Approach By Alex Coad; Rekha Rao
  3. How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines By Austan Goolsbee; Chad Syverson
  4. Retail Prices and Facility-Based Entry into the Telecommunications Market By David Gabel; Carolyn Gideon
  5. Consolidation in the Wireless Phone Industry By Jeremy T. Fox
  6. Patents and the Performance of Voluntary Standard Setting Organizations By Marc Rysman; Tim Simcoe
  7. Two-sided competition of proprietary vs. open source technology platforms and the implications for the software industry1 By Nicholas Economides; Evangelos Katsamakas
  8. The Effect of P2P File Sharing on Music Markets: A Survival Analysis of Albums on Ranking Charts By Sudip Bhattacharjee; Ram D. Gopal; Kaveepan Lertwachara; James R. Marsden; Rahul Telang
  9. Cell Phone Demand and Consumer Learning – An Empirical Analysis By Martin Gaynor; Yunfeng Shi; Rahul Telang; William Vogt
  10. Indirect Network Effects and the Product Cycle: Video Games in the U.S., 1994-2002 By Matthew T. Clements; Hiroshi Ohashi
  11. An economic analysis of enterprise adoption of open source software By Evangelos Katsamakas; Mingdi Xin
  12. Strategic Product Pre-announcements in Markets with Network Effects By Jay Pil Choi; Eirik Gaard Kristiansen; Jae Nahm

  1. By: Alex Coad; Rekha Rao
    Abstract: We relate innovation to sales growth for incumbent firms in four high-tech sectors. A firm, on average, experiences only modest growth and may grow for a number of reasons that may or may not be related to ‘innovativeness’. However, given that firms are heterogeneous and that growth rates distributions are heavy-tailed, it may be misleading to use regression techniques that focus on the ‘average firm’. Using a quantile regression approach, we observe that innovativeness is of crucial importance for a handful of ‘superstar’ fast-growth firms. We also discuss policy implications of our results.
    Keywords: Innovation, Firm Growth, Quantile Regression, Innovation Policy
    Date: 2006–08–23
  2. By: Katja Seim (Graduate School of Business, Stanford University); V. Brian Viard (Graduate School of Business, Stanford University)
    Abstract: We test the effect of entry on the tariff choices of incumbent cellular firms. We relate the change in the breadth of calling plans between 1996, when incumbents enjoyed a duopoly market, and 1998, when incumbents faced increased competition from personal communications services (PCS) firms. Entry by PCS competitors differed across geographic markets due to the number of licenses left undeveloped as a result of the bankruptcy of some of the auctions’ winning bidders and due to variation across markets in the time required to build a sufficiently large network of wireless infrastructure. We find that incumbents increase tariff variety in markets with more entrants and that this effect is not explained by demographic heterogeneity or cost differences in maintaining calling plans across markets. We also find that incumbents are more likely to upgrade their technology from the old analog technology to the new digital technology in markets with more entry, suggesting that entry also has indirect effects on tariff choice via firms’ technology adoption decisions.
    Keywords: entry, market structure, cellular, price discrimination, nonlinear pricing, telecommunications
    JEL: L11 L13 L25 L96
    Date: 2004–11
  3. By: Austan Goolsbee (University of Chicago); Chad Syverson (University of Chicago)
    Abstract: This paper examines how incumbents respond to the threat of entry of competitors, as distinguished from their response to competitors’ actual entry. It uses a case study from the passenger airline industry—specifically, the evolution of Southwest Airlines’ route network—to identify particular routes where the probability of future entry rises abruptly. When Southwest begins operating in airports on both sides of a route but not the route itself, this dramatically raises the chance they will start flying that route in the near future. We examine the pricing of the incumbents on threatened routes in the period surrounding such events. We find that incumbents cut fares significantly when threatened by Southwest’s entry into their routes. This is true even after controlling in several ways for airport-specific operating costs. The response of incumbents seems to be limited only to the threatened route itself, and not to routes out of nearby competitor airports where Southwest does not operate (e.g., fares drop on routes from Chicago Midway but not Chicago O’Hare). The largest responses appear to be restricted to routes that were concentrated beforehand. Incumbents do experience short-run increases in their passenger loads concurrent with these fare cuts. This is consistent with theories implying incumbents will try to generate some longer-term loyalty among current customers before the entry of a new competitor. We examine evidence relating this demand-building motive to frequent flyer programs and find suggestive evidence in favor of this notion. There is only weak evidence that incumbents increase capacity on the routes.
    Date: 2004–12
  4. By: David Gabel (Queens College); Carolyn Gideon (Tufts University)
    Abstract: There is growing sentiment that rate rebalancing to eliminate cross subsidies between local business and local residential telephone markets is necessary to induce efficient entry in the residential market. If the elasticity of supply with respect to the relative prices for business and residential local service is high in both the local business and local residential markets, then the efficiency gains from rebalancing may be large. Alternatively, other factors related to differences in characteristics between business and residential local telephone markets, such as lower costs, lower elasticity of demand, and greater willingness-to-pay for quality or redundancy in the business segment of local telephone may be more important determinants of entry. In this paper we simultaneously measure the elasticity of supply in the business market with regards to the price of business services relative to the price of residential service, using entry, economic and demographic data a the wire center level. We find that business entry is driven by market demand and cost characteristics, and that the effect of cross subsidies in prices on entry is less clear.
    Date: 2005–10
  5. By: Jeremy T. Fox (University of Chicago)
    Abstract: The initial wireless phone industry in the United States had many competitors, but due to mergers and acquisitions the industry has become highly consolidated. This paper documents the history of the consolidation. More importantly, I use the geographic path of consolidation to distinguish whether consolidation has been motived by retail market power or efficiency explanations. One efficiency explanation is that consumers prefer national coverage areas. I use data on roaming agreements in the early cellular industry to analyze whether contracts can substitute for roaming agreements. Finally, in joint work with Patrick Bajari and Stephen Ryan we estimate the consumer valuation for national coverage areas using plan demand data.
    Date: 2005–10
  6. By: Marc Rysman (Boston University, Department of Economics); Tim Simcoe (J.L. Rotman School of Management, University of Toronto)
    Abstract: This paper measures the technological significance of voluntary standard setting organizations (SSOs) by examining citations to patents disclosed in the standard setting process. We find that SSO patents are cited far more frequently than a set of control patents, and that SSO patents receive citations for a much longer period of time. Furthermore, we find a significant correlation between citation and the disclosure of a patent to an SSO, which may imply a marginal impact of disclosure. These results provide the first empirical look at patents disclosed to SSOs, and show that these organizations not only select important technologies, but may also play a role in establishing their significance.
    Date: 2005–10
  7. By: Nicholas Economides (Stern School of Business, NYU); Evangelos Katsamakas (Fordham University)
    Abstract: Technology platforms, such as Microsoft Windows, are the hubs of technology industries. We develop a framework to characterize the optimal two-sided pricing strategy of a platform firm, that is, the pricing strategy towards the direct users of the platform as well as towards firms offering applications that are complementary to the platform. We compare industry structures based on a proprietary platform (such as Windows) with those based on an open-source platform (such as Linux) and analyze the structure of competition and industry implications in terms of pricing, sales, profitability, and social welfare. We find that, when the platform is proprietary, the equilibrium prices for the platform, the applications, and the platform access fee for applications may be below marginal cost, and we characterize demand conditions that lead to this. The proprietary applications sector of an industry based on an open source platform may be more profitable than the total profits of a proprietary platform industry. When users have a strong preference for application variety, the total profits of the proprietary industry are larger than the total profits of an industry based on an open source platform. The variety of applications is larger when the platform is open source. When a system based on an open source platform with an independent proprietary application competes with a proprietary system, the proprietary system is likely to dominate the open source platform industry both in terms of marketshare and profitability. This may explain the dominance of Microsoft in the market for PC operating systems.
    Date: 2005–10
  8. By: Sudip Bhattacharjee (School of Business, University of Connecticut); Ram D. Gopal (School of Business, University of Connecticut); Kaveepan Lertwachara (School of Business, University of Connecticut); James R. Marsden (School of Business, University of Connecticut); Rahul Telang (H John Heinz III School of Public Policy and Management, Carnegie Mellon University)
    Abstract: Recent technological and market forces have profoundly impacted the music industry. Emphasizing threats from peer-to-peer (P2P) technologies, the industry continues to seek sanctions against individuals who offer significant number of songs for others to copy. Yet there is little rigorous empirical analysis of the impacts of online sharing on the success of music products. Combining data on the performance of music albums on the Billboard charts with file sharing data from a popular network, we: 1) assess the impact of recent developments related to the music industry on survival of music albums on the charts, and 2) evaluate the specific impact of P2P sharing on an album’s survival on the charts. In the post P2P era, we find significantly reduced chart survival. The second phase of our study isolates the impact of file sharing on album survival. We find that sharing does not seem to hurt the survival of albums.
    Keywords: peer-to-peer, digitized music, online file sharing, survival.
    Date: 2005–10
  9. By: Martin Gaynor (H. John Heinz III School of Public Policy and Management Carnegie Mellon University); Yunfeng Shi (H. John Heinz III School of Public Policy and Management Carnegie Mellon University); Rahul Telang (H. John Heinz III School of Public Policy and Management Carnegie Mellon University); William Vogt (H. John Heinz III School of Public Policy and Management Carnegie Mellon University Author-Workplace-Homepage)
    Abstract: A structural model is used in this paper to analyze the demand and learning behavior in cell phone market. We assume that the cell phone consumption can be divided into a high-value part and a low-value part. The consumers are assumed to be uncertain about the exogenous shock of the need for high-value usage and also their preferences over the low-value usage. Meanwhile, we assume that the consumers’ knowledge improves over time. As a result, the match between their plan choice and consumption pattern becomes better. Such a learning behavior is supported by the data set. Bayesian updating is used to represent the learning. The estimates of the parameters are obtained and compared to the benchmarks from previous research.
    Date: 2005–10
  10. By: Matthew T. Clements (University of Texas); Hiroshi Ohashi (University of Tokyo)
    Abstract: This paper examines the importance of indirect network effects in the U.S. video game market between 1994 and 2002. The diffusion of game systems is analyzed by the interaction between console adoption decisions and software supply decisions. Estimation results suggest that introductory pricing is an effective practice at the beginning of the product cycle, and expanding software variety becomes more effective later. The paper also finds a degree of inertia in the software market that does not exist in the hardware market. This observation implies that software providers continue to exploit the installed base of hardware users after hardware demand has slowed.
    Keywords: indirect network effects; penetration pricing; software variety
    JEL: C23 L68 M21
    Date: 2004–10
  11. By: Evangelos Katsamakas (Graduate School of Business, Fordham University); Mingdi Xin (Stern School of Business, New York University)
    Abstract: The emergence of open source and Linux has burdened IT managers with the challenge of whether, when, and in what applications to adopt open source software in their firms. We characterize the conditions under which enterprises adopt open source software. We show that adoption depends crucially on network effects, the fit of software with the range of applications used by each firm, and the IT capabilities of a firm. Our model predicts that most firms will adopt a heterogeneous IT architecture that consists of open source and proprietary software. The equilibrium adoption is often socially inefficient. This is the first paper in the open source literature to model the enterprise adoption of open source.
    Keywords: Open source software, Linux, IT management, IT architecture, IT capabilities, technology adoption.
    Date: 2005–10
  12. By: Jay Pil Choi (Michigan State University); Eirik Gaard Kristiansen (Michigan State University); Jae Nahm (HKUST, Hong Kong)
    Abstract: It is a widely adopted practice for firms to announce new products well in advance of actual market availability. The incentives for pre-announcements are stronger in markets with network effects because they can be used to induce the delay of consumers’ purchases and forestall the build-up of rival products’ installed bases. However, such announcements often are not fulfilled, raising antitrust concerns. We analyze the effects of product pre-announcements in the presence of network effects when firms are allowed to strategically make false announcements. We also discuss their implications for consumer welfare and anti-trust policy.
    JEL: L1 D8
    Date: 2005–09

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