network externalities technological progress and the competition of market contracts abstract network externalities are used to describe the fact that many modern products become more valuable the more users adopt products of the same technology where network externalities and technological progress exist the various kinds of inefficiencies discussed in the recent literature can be explained by different types of contracts the main categories analysed are simple market contracts update contracts and service contracts it is shown that these types of contract emerge endogenously from the incentive structure of profit maximizing firms competition between these contracts may substantially reduce inefficient allocations caused by network externalities

tipping and concentration in markets with indirect network effects this paper develops a framework for measuring tipping the increase in a firm s market share dominance caused by indirect network effects our measure compares the expected concentration in a market to the hypothetical expected concentration that would arise in the absence of indirect network effects in practice this measure requires a model that can predict the counterfactual market concentration under different parameter values capturing the strength of indirect network effects we build such a model for the case of dynamic standards competition in a market characterized by the classic hardware software paradigm to demonstrate its applicability we calibrate it using demand estimates and other data from the 32 64 bit generation of video game consoles a canonical example of standards competition with indirect network effects in our example we find that indirect network effects can lead to a strong economically significant increase in market concentration we also find important roles for beliefs on both the demand side as consumers tend to pick the product they expect to win the standards war and on the supply side as firms engage in penetration pricing to invest in growing their networks

tying and innovation a dynamic analysis of tying arrangements this paper analyses the effects of tying arrangements on r d incentives it shows that tying is a means through which a firm can commit to more aggressive r d investment in the tied goods market tying also has the strategic effect of reducing rivals incentives to invest in r d the strategy of tying is a profitable one if the gains via an increased share of dynamic rents in the tied goods market exceed the losses that result from intensified price competition in the market the welfare implications of tying and consequently the appropriate antitrust policy are discussed

self reinforcing mechanisms and market information abstract we consider the possibility of switching between two technological standards when there are network externalities and imprecise market information by modeling the decisions of each firm by a stochastic process necessary and sufficient conditions for there to be multiple equilibria in market share and for permanent lock in to one of these equilibria not to occur are presented in such a case the market lingers at prevalence of one standard with intermittent transitions to prevalence of the other the frequency of which is derived by the theory of large deviations

climbing the hierarchical ladders of rules a life cycle theory of institutional evolution this paper proposes an analysis of the emergence and evolution of institutional frameworks it explains the causes process and outcome of institutional evolution we first describe the institutional framework as a multilevel system at the bottom of which several local and flexible institutions apply to subsets of the society while at the top a single generic and rigid institution applies to all dissatisfied with generic order promoters of local orders try to design collective governance solutions that are better suited to their needs if agents are heterogeneous as we assume then coordination needs differ and a competitive process begins among sponsors of alternative orders to benefit from efficiency gains promoters of local orders encourage adherence to their preferred system of rules the resulting competition for adherents explains why local and voluntary institutions might progressively turn into generic and mandatory ones we thus establish a logical continuum between contractual governance mechanisms and institutions we then analyze the strategic interplay among sponsors of alternative institutional orders by considering not only the horizontal competition among institutions emerging in the same time but also the vertical competition between promoters of new rules and sponsors of the established more generic rules

state and standards in this paper a new economic approach to standardization has been presented standardization has been regarded as a problem ofgradual choice an individual chooses to apply more or less standards within a hierarchy of standards with this decomposition of standards the problem of strategic market power becomes less important than in the traditional models of standardization it becomes possible to analyze the problems of network externalities within a framework of non strategic behavior and to apply the tools of the traditional theory of externalities and public goods while decentralized action may lead to too little standardization committees may overcome this deficiency to some extent but bureaucracies are likely to lead to overstandardization in the empirical section of the paper it has been shown that our approach can be applied to the standard setting process in languages railroads and telecommunications in all three cases the tendency of bureaucracies to generate more standardization than committees has been corroborated

compatibility and bundling of complementary goods in a duopoly this paper presents a simple model of compatibility and bundling in industries where consumers assemble several necessary components into a system that is close to their ideal the authors show that for a wide range of parameters firms will choose to produce compatible components but will offer discounts to consumers who purchase all components from the same firm however firms would be better off if they could commit not to provide such discounts furthermore the equilibrium tends to involve socially excessive bundling finally mixed bundling strategies tend to increase the range of parameters over which socially excessive standardization occurs copyright 1992 by blackwell publishing ltd

installed base and compatibility innovation product preannouncements and predation a good is often more valuable to any user the more others use compatible goods the authors show that this effect may inhibit innovation if an installed base exists and transition to a new standard must be gradual early adopters bear a disproportionate share of transient incompatibility costs this can produce excess inertia the installed base however is stranded if the new standard is adopted this may create excess momentum these dynamic effects have strategic implications temporary price cutting can permanently prevent entry and product preannouncements can be critical in innovation these strategic actions have ambiguous welfare effects

optimal bundling of technological products with network externality for many high tech and internet related products utility to consumers depends in part on the size of the user base a phenomenon called network externality a firm with a portfolio of these and other products that are often asymmetric in their degree of network externality or marginal cost may have to look beyond the traditional strategies of pure components pure bundling and mixed bundling one such strategic alternative in a two product case would be a so called mixed bundling 1 under which the bundle and product 1 are offered but the other product can only be purchased in a bundled form the purpose of this study is to compare and contrast the impact of such asymmetry or symmetry in direct network externality and cost on the choice of bundling strategies we model a monopolist firm that has a product in each of two categories and faces heterogeneous consumers results suggest that pure bundling is more profitable when both products have low marginal costs or high network externality whereas pure components or mixed bundling 1 is more profitable when the products diverge in their costs and network externality e g only one product has network externality traditional mixed bundling is optimal in other instances

attack defence and contagion in networks sanjeev goyal acknowledges support from a keynes fellowship cambridge inet institute and european research area complexity net resilience and interaction of networks in ecology and economics adrien vigier acknowledges support from a gates cambridge fellowship as well as a core fellowship from universite catholique de louvain

complementarity coordination and compatibility the role of fixed costs in the economics of systems abstract we analyze industry equilibrium and incentive to compatibility when goods produced by different producers generate utility only when consumed as component parts of a system we assume the presence of two systems each composed of some basic component and a set of differentiated complementary products the combination of complementarity between the two components of the system and of fixed costs in the production of the complementary product results in a form of network effect we focus on the role played by the size of the fixed costs in the production of the complementary products in determining the size of this system effect and by this means the structure and types of equilibria that may be observed monopolistic or duopolistic symmetric or asymmetric we also highlight the consequence of the same fixed costs for the private and social incentives to render the systems compatible

innovation regimes r d and radical innovations in telecommunications abstract by introducing the concept of innovation regimes the aim of this article is to show how the rapid pace of technological development in the telecom sector may be explained by the close links between the sector s own r d and the creation of numerous innovations many of which are radical in contemporary innovation theory a theoretical antinomy exists whereas the creation of incremental innovations is variously explained in terms of rational responses to markets dynamics of technological regimes dominant design etc radical innovations in contrast are explained in terms of serendipity chance or haphazard scientific discoveries evidence from analysis of innovations in the telecom sector suggests that innovation regimes have provided a capability of coordination direction and leadership in the creation of many of the radical technological innovations that have emerged in the sector thus one may claim that the strong innovation regimes and high r d intensity of the telecom sector at least until recently have provided a capability of creating innovations on purpose for a purpose the policy implications of this contradict some of the assumptions on which the prevailing market oriented r d governance models and policies are based and which are supported by contemporary innovation theories

information imitation and growth abstract this paper presents an analysis of the role of information in determining the growth and development prospects of economies in an overlapping generations model producers of capital choose between two types of technology safe and risky depending on the information available decision making may or may not be characterised by herd behaviour whereby each producer imitates the decisions of others in an information cascade multiple development regimes arise when the quality of information is determined endogenously through purposeful but costly activities it is shown that both the prospect of transition between these regimes and the characteristics of the transition path can be very different in imitation free and imitation prone economies

price competition and compatibility in the presence of positive demand externalities in many cases the benefit to a consumer of a product increases with the number of other users of the same product these demand interdependencies are referred to in the literature as positive demand externalities or network externalities this paper examines the dynamic pricing behaviors of an incumbent and a later entrant with special attention to the impacts of demand externalities compatibility and competition on prices and profits defining market power as the ability to price above a competitor without losing market share we show how demand externalities and installed base combine to confer market power we model optimal pricing as a differential game with the optimal price trajectory established as nash open loop controls for a duopoly durable goods market with strong demand externalities the results show an increasing price trajectory can be optimal as expected a new entrant is better off if its products are compatible with those of the incumbent especially when demand externalities are strong and the installed base of the incumbent is large less intuitively the incumbent as well may be better off agreeing on common standards the comparison of monopoly and duopoly shows that under strong demand externalities and a small installed base the incumbent profits from compatible entry

shared atm networks and banking competition abstract in this paper we study the incentives of banks to share their automatic teller machines atms when they are competitors in the market for deposits we construct a stylized model of banking competition which emphasises the distinctive features of atm compatibility we find that in equilibrium either a strict subset of banks share their atms or total incompatibility prevails we also derive the implications for atm compatibility of withdrawal fees interchange bank fees entry and depositor switching costs finally we investigate the normative implications of our model and draw some policy conclusions

the pricing of convexity risk and timedecay in options markets abstract option valuation formulas typically assume all risk can be eliminated in a continuously rebalanced hedge but convexity of the option pricing function and time decay cause risk in real world hedges we find strong evidence in stock options transactions data from periods 10 years apart that the market prices these risks there is a significant price effect associated with convexity that becomes larger immediately following a period of larger stock price movements although time decay is highly correlated with convexity a multiple regression including both factors shows it to have a significant independent effect the results from the two sample periods are highly consistent as are pre and post crash results from the year 1987

the impact of standards competition on consumers effectiveness of product information and advertising formats abstract compared with other markets those with competing technological standards exhibit certain fundamental characteristics that make a consumer s decision to adopt a new product more risky and more complex this article examines how standards competition affects consumer behavior an issue that has been relatively neglected by previous research in this area the results show that consumers depend on different types of information in their adoption decisions and respond differently to advertising specifically the authors find that standards competition motivates consumers to pay more attention to information that is comparative in nature thus information about the relative absolute performance of a product has a stronger weaker impact on a product s share in markets with standards competition study 1 standards competition also moderates the effectiveness of different advertising formats it strengthens the effect of comparative advertisements but weakens the effect of noncomparative advertis

do converters facilitate the transition to a new incompatible technology a dynamic analysis of converters abstract this paper analyzes the process of transition in standards between incompatible technologies when converters are available contrary to a common presumption that converters facilitate the transition from an old technology to an otherwise incompatible new technology i find circumstances in which the possibility of transition is blockaded by the existence of converters in the welfare analysis of converters a distinction is made between ex ante and ex post efficiency effects finally i also analyze the equilibrium behavior in the provision of converters and compare it to the socially optimal outcome

competing technologies the learning curve and rational expectations abstract the problem of choice between several variants of a technology subject to dynamic learning economies is examined in a rational expectations model with overlapping adopters it is shown that even with rational expectations the long term market outcome depends sensitively on the pattern of early chance events and that only one variant of the technology will come to dominate the market in the long run this variant need not be the one which is socially optimal or most promising technically

network externalities and market segmentation in a monopoly abstract network externalities characterize the consumption of many products in a setting where a monopolist does not price discriminate without externalities we show that presence of network externalities induces the monopolist to price discriminate and segment its market

estimating policy effects on spatial market efficiency an extension to the parity bounds model the standard parity bounds model pbm is extended to allow for dynamic shifts in regime probabilities in response to changes in marketing policy the approach allows estimation of the length of the adjustment period and a statistical test for no policy effects the extended pbm is applied to maize and wheat markets in ethiopia evidence of a dynamic adjustment path is found and grain marketing reforms are found to have improved spatial efficiency in a few markets worsened it in a few others but generally to have had little effect on the spatial efficiency of ethiopian grain markets

globalizing carbon lock in this paper extends the arguments surrounding carbon lock in elaborated in unruh energy policy 28 2000 817 30 2002 317 to countries currently undergoing industrialization it argues that for numerous reasons industrializing countries are unlikely to leapfrog carbon intensive energy development on the contrary carbon lock in may be globalizing and could further constrain climate change mitigation options it is then argued that many policy recommendations ignore carbon lock in possibly limiting their potential for successful implementation the paper then discusses four policy approaches that appear to have advantages given lock in conditions it is recognized however that relative ease of implementation does not necessarily equate with superiority instead it is merely a path dependent outcome of past development decisions pursuing policies on the basis of relative implementation ease may help address the issue of climate change but could also result in sub optimal outcomes along other dimensions of sustainable development

returns to investors in stocks in new industries i introduction one thousand dollars invested in america online s initial public offering ipo in march 1992 became 295 545 by the end of 2000 when aol was purchased by time warner this is an extraordinary payoff for shareholders over 5 per month while this investment has an outstanding return new industries have high risk and their stocks are likely to have high expected returns on the other hand the extraordinary behavior of dot corn stocks makes this conclusion less than obvious the stratospheric prices of dot corn stocks and returns to some shareholders suggest that expected returns in a new industry may well be dominated by forces not common in more mature industries one possibility is euphoria or craziness an explanation given more plausibility by the boom and bust in dot corn stock prices another explanation is that such stocks are similar to options and lottery tickets this possibility has occurred to many observers among them alan greenspan who observed that when you are dealing with stock the possibilities of which are either it s going to be valued at zero or some huge number you get a premium in that stock price which is exactly the same sort of price evaluation process that goes on in the lottery blumberg capital 1999 perhaps stocks in new industries have a distribution of returns that includes the possibility of large gains and small losses if so then investors may buy stocks for the same reasons that people are willing to pay for lottery tickets this explanation could be consistent with high valuations and even negative expected returns because investors are willing to pay on average to have a small probability of a large gain 1 indeed the limited history of dot corns suggests realization of substantial negative returns the geometric return to shareholders averaged across dot coms is 4 3 per month even so the history of dot coms probably is too short to deliver very reliable evidence on the expected return in new industries this average return to stockholders is based on the same firms as in the study by hand 2001 but there are only five firms in the center for research in security prices crsp data for these firms as recently as 1995 and the financial crisis of 2007 and 2008 would suggest ending the data in 2006 we estimate expected returns in new industries by examining new industries with longer experiences than dot coms many analogies have been drawn between dot coms and earlier industries as far back as railroads and telegraphs for example in business week mandel 1999 hof and hamm 2002 the economist 2000 nairn 2002 and perez 2002 2 among these analogies is the importance of network effects network effects are important for dot coms and they are important for some of the industries examined in this paper industries examined in this paper include network industries if a network industry is defined as one in which a standard for the product or the availability of complementary inputs has high marginal value for the industry one such industry is the automobile industry which standardized on gasoline engines instead of electricity or steam another is the telegraph industry for which interconnection is as crucial as for the internet while it is less obvious interconnection is an important issue for railroads as well when differences in track width gauge are large enough connections across lines can require unloading and reloading railroad cars gauge was not standardized in the united states until the 1880s and even today gauge in spain and portugal is different than in the rest of europe in this paper we examine the returns in major new industries in the united states and summarize the distribution of returns over the period of the industry s development our paper is related to papers by fama and french 2001 and gompers and lerner 2003 fama and french 2001 examine the returns on newly listed firms in the crsp data set from 1926 to 2000 and find that these firms returns are similar to their benchmark returns

boom and bust patterns in the adoption of financial innovations we develop a dynamic model of the adoption of financial innovations each period firms decide whether or not to adopt an innovation of uncertain value and the profitability of each period s adoptions reveals information about the innovation s value we show that characteristics of financial innovation waves cited by critics as evidence of irrational excess are in fact consistent with fully rational behavior we also show that social welfare is enhanced when more firms adopt innovations of questionable value and that financial intermediaries base an incentive to encourage such adoption article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

comments on whaley s note abstract valuation by duplication is a useful conceptual technique but it does not yield unique formula many duplicating portfolios some simpler than the three security portfolio in roll and whaley exist for this problem valuing the actual single security will generally yield conceptually and computationally simpler solutions

the provision of two way converters in the transition process to a new incompatible technology this paper analyzes the dynamic provision of converters in the transition process between two incompatible technologies i derive the equilibrium behavior in the provision of converters and compare it to the socially optimal outcome i find that there can be two types of market inefficiency in the provision of converters first converters can be supplied by the wrong group second the timing of provision may be too late since the providers of converters ignore the positive externality that their provision would confer on the users of the rival technology

social learning and dynamic pricing of durable goods we analyze the impacts of social learning sl on the dynamic pricing and consumer adoption of durable goods in a two period monopoly consumers can make either early uninformed purchases or late but potentially informed purchases as a result of social learning several results are derived first we identify the market conditions under which ex ante homogeneous consumers may choose to purchase at different times second equilibrium adoption may demonstrate inertia where all adopt late or frenzy where all adopt early in particular adoption inertia appears when sl intensity is reasonably high but may vanish when sl intensity exceeds a certain threshold third firm profits and social welfare first weakly decrease in sl intensity and may then jump up by a lump sum amount at the threshold sl intensity level mentioned above last we show that the firm potentially benefits from informative advertising or investing to cultivate more social learning

food production strategy debates in revolutionary ethiopia abstract for more than a decade two strategies of rural development have competed for the attention of ethiopian policymakers 1 the smallholder approach based on individual freehold a strong private sector and public expenditures in support of essential agricultural sector institutions and infrastructure and 2 the agrarian socialism approach based on collective ownership of the means of production group farming state farms and government control of marketing the article reviews the history and direction of this debate outlining in the process current government policies aimed at promoting agrarian socialism and their effects on food production and the quality of rural life it concludes that ethiopia will suffer ever increasing food deficits until it abandons its current agrarian strategy in favor of smallholder productivity and it offers a range of options for donors involved in programs and projects promoting ethiopia s agricultural development

when does predation dominate collusion i study repeated competition among oligopolists the only novelty is that firms may go bankrupt and permanently exit the probability that a firm survives a price war depends on its financial strength which varies stochastically over time under some conditions including no entry an anti folk theorem holds when firms are patient so that strength levels change relatively quickly every nash equilibrium involves an immediate price war that lasts until at most one firm remains surprisingly the possibility of entry may facilitate collusion as may impatience the model can explain some observed patterns of collusion and predation

announcement entry and preemption when consumers have switching costs i study the incentives of innovating firms to announce their entry in markets in which consumers incur a cost of switching from one product to another announcing entry can prevent the lock in of potential demand before the launch of the new product at the same time however the incumbent firm learns about the impending entry and has the opportunity to cut prices and preempt the market in equilibrium entrants do not always announce and i show that this behavior maximizes ex ante total welfare by contrast consumers might be better off with a ban on announcements when the entrant s claims are not verifiable vaporware announcements arise in equilibrium and i demonstrate that they can be beneficial for consumers

technology adoption in the presence of network externalities we analyze technology adoption in industries where network externalities are significant the pattern of adoption depends on whether technologies are sponsored a sponsor is an entity that has property rights to the technology and hence is willing to make investments to promote it key findings include the following 1 compatibility tends to be undersupplied by the market but excessive standardization can occur 2 in the absence of sponsors the technology superior today has a strategic advantage and is likely to dominate the market 3 when one of two rival technologies is sponsored that technology has a strategic advantage and may be adopted even if it is inferior 4 when two competing technologies both are sponsored the technology that will be superior tomorrow has a strategic advantage

the diffusion of clean technologies a review with suggestions for future diffusion analysis abstract this article gives an overview of the literature on clean technology diffusion followed by suggestions for future analysis findings from diffusion analysis are presented in the form of 10 stylised facts helping the reader to see the forest for the trees the overall conclusion is that the diffusion of clean technology same as the diffusion of normal innovations is governed by endogenous mechanism epidemic learning and learning economies and by exogenous mechanisms policy is important for clean technology diffusion but other factors are important too the characteristics of the clean technology absorptive capacities of potential adopters and the age structure of capital it is often overlooked that companies have a choice they can choose between an end of pipe solution a process change adaptation and a change of process substitution this means that the diffusion and evolution of one clean technology will be at the expense of the diffusion of another clean technology something overlooked in studies on clean technology diffusion further research is needed on the influence of public policy on clean technology choice expectations about learning economies and prices adjustment costs network externalities and complementary innovations on clean technology adoption choices

currency competition network externalities and switching costs towards an alternative view of optimum currency areas existing models of currency competition and monetary union ignore network effects and switching costs this paper develops a simple model that incorporates these features and shows how it can be used to shed light on observed monetary experience and current issues in international monetary relations it explains why agents will often be reluctant to switch currencies highlights the role of expectations and sheds light on the nature of currency competition and the effect of legal restrictions copyright 1993 by royal economic society

technology revolutions in the presence of network externalities abstract the purpose of this paper is to investigate the effect of varying consumer preferences over technology advance and network size on the timing and frequency of new technology adoption in the presence of installed bases resulting from network externalities the paper shows that the duration of each adopted technology and the frequency of technology adoptions depend on a whether in consumers perspectives the network size effect is a substitute for or a complement to the quality of the technologies b the degree of compatibility of new technologies with the old technology and c the technology growth rate and consumer population size

the american put option and its critical stock price we derive an expression for the critical stock price for the american put we start by expressing the put price as an integral involving first passage probabilities this approach yields intuition for merton s result for the perpetual put we then consider the finite lived case using 1 the fact that the put value ceases to depend on time when the critical stock price is reached and 2 the result that an american put equals a european put plus an early exercise premium we derive the critical stock price we approximate the critical stock price function to compute accurate put prices kim 1990 jacka 1991 and carr jarrow and myneni 1992 showed that the american put price is equal to the corresponding european put price plus an integral representing the early exercise premium however to use their approach one needs to know the critical stock price which may be defined in three equivalent ways 1 it is the value of the stock price at which one is indifferent between exercising and not exercising the put

transforming feudal agriculture agrarian change in ethiopia since 1974 this article seeks to examine the nature and consequences of agrarian change in ethiopia since the revolution of 1974 it argues that while the reforms implemented since 1975 have effectively destroyed the age old feudal framework of agriculture they have not yet created a coherent new framework even though the government s proclaimed objective is to develop a co operative framework not much progress in that direction has so far been made in fact state policies in the past few years were dictated by the need to cope with short term problems arising from a decline in production and marketed surplus of food in the immediate aftermath of the reforms the analysis in this article shows that the basic problem of peasant agriculture is that it currently produces only a meagre economic surplus at this stage therefore agricultural growth is to be achieved primarily through the promotion of labour investment this is the principal argument for co operativisation this view suggests state policies which are

production technologies in ethiopian agriculture abstract this article examines the characteristics of and choice among two production technologies in ethiopian agriculture one with fertilizer and the other without using 1989 90 farm level data for northwest and central ethiopia fertilizer usage determinants are estimated simultaneously with technology specific production functions for southern ethiopia where fertilizer is rarely used a single production function is estimated three conclusions emerge first fertilizer use is not significantly affected by a farm s stocks of capital or land this is consistent with the fact that fertilizer allocation decisions under the deposed mengistu regime were politicized to the point where farmers had little control over use second fertilizer is associated with a smaller factor share for cattle and a larger share for land meaning that those who control land may gain relative to the individual farmers who own cattle as the country develops agriculturally third farms without fertilizer in northwest and central ethiopia tend to be too small a problem due to population pressures on the land and communal methods of land allocation this suggests that land allocation institutions should adjust by distributing land to a smaller but more economically viable number of farmers

local network externalities and market segmentation this paper models interaction between groups of agents by means of a graph where each node represents a group of agents and an arc represents bilateral interaction it departs from the standard katz shapiro framework by assuming that network benefits are restricted only amongst groups of linked agents it shows that even if rival firms engage in bertrand competition this form of network externalities permits strong market segmentation in which firms divide up the market and earn positive profits the analysis also shows that some graphs or network structures do not permit such segmentation while for others there are easy to interpret conditions under which market segmentation obtains in equilibrium c 2009 elsevier b v all rights reserved

the welfare implications of unauthorized reproduction of intellectual property in the presence of demand network externalities this paper finds that unauthorized reproduction of intellectual property in the presence of demand network externalities can not only induce greater firm profits relative to the case where there is no copying it can lead to a pareto improvement in social welfare ceteris paribus when network externalities are present firms have a greater incentive to expand output because marginal revenue is higher and or they may wish to create preemptive installed bases this paper suggests that unauthorized copying can be a relatively efficient means of achieving this by allowing the firm in effect to price discriminate among different classes of consumers copyright 1994 by blackwell publishing ltd

coalition formation in standard setting alliances we present a theory for predicting how business firms form alliances to develop and sponsor technical standards our basic assumptions are that the utility of a firm for joining a particular standard setting alliance increases with the size of the alliance and decreases with the presence of rivals in the alliance especially close rivals the predicted alliance configurations are simply the nash equilibria i e those sets of alliances for which no single firm has an incentive to switch to another alliance we illustrate our theory by estimating the choices of nine computer companies to join one of two alliances sponsoring competing unix operating system standards in 1988

the economics of networks a survey of the empirical literature network effects the increase in value of consuming a product if many other consumers use the same product are a feature of many markets and in particular of many high technology products this paper surveys the burgeoning empirical literature that has developed especially during the last years after theoretical work dominated the earlier years of research in this area newer research has combined theoretical models with empirical studies and applied work with direct implications for public policy marketing and company strategies furthermore insights from the study of social networks have been applied to analyse how consumers interact with each other the paper argues that a closer analysis of the network structure of consumer interaction promises fruitful future research avenues and advances in our understanding of how network effects operate copyright 2009 blackwell publishing ltd

predation and its rate of return the sugar industry 1887 1914 we show that the price wars following two major entry episodes were predatory our proof is twofold by direct comparison of price to marginal cost and by construction of a lower bound to predicted competitive price cost margins that we show to exceed observed margins predation occurred only when its relative cost to the dominant firm the american sugar refining company asrc was small its most clear effect was to lower the acquisition price of entrants and small incumbents it may also have deterred future capacity additions and raised asrc s share of industry profits predation operated by strengthening asrc s reputation as a willing predator

two sided markets a progress report the paper provides a road map to the burgeoning literature on two sided markets and presents new results it identifies two sided markets with markets in which the structure and not only the level of prices charged by platforms matters the failure of the coase theorem is necessary but not sufficient for two sidedness the paper builds a model integrating usage and membership externalities that unifies two hitherto disparate strands of the literature emphasizing either form of externality and obtains new results on the mix of membership and usage charges when price setting or bargaining determine payments between end users

rural taxation in ethiopia 1981 1989 a policy analysis matrix assessment for net producers and net consumers abstract during the period of socialist rule 1974 1991 ethiopian agriculture was subject to an array of policy interventions this paper uses a policy analysis matrix pam approach to determine the effects of various policies on different types of households and in aggregate the analysis extends the usual use of pams by including consumption requirements and by addressing the variation in the impact of specific policies through time household models are used to quantify the effects of government intervention on both net consumers and net producers of cereals the analysis reveals that although cereal purchases were sometimes subsidized through overvaluation cereal deficit households paid high prices because of market segmentation and experienced reduced incomes due to exchange rate distortions households that tended to be surplus faced substantial indirect taxes through low producer prices results suggest that undistorted markets could enable many farms to accumulate sufficient reserves to cope with production variations but farms with average land availabilities are not sustainable given current technologies even with efficient commodity markets

the city network paradigm measuring urban network externalities in recent years network behaviour has been analysed extensively as the emerging model for economic growth by network behaviour a metaphor for co operative behaviour among individuals corporate

theorizing path dependence a review of positive feedback mechanisms in technology markets regional clusters and organizations the concept of path dependence has often been criticized as vague and only narrowly applicable although we can find some very refined definitions of the concept we also find a wide range of empirical phenomena being described as path dependent we argue that more detailed accounts of the positive feedback mechanisms that form paths can take path dependence beyond this state of being overdetermined but under specified reviewing three well described cases of path dependent dynamics in technology markets regional clustering and organizations we define a core set of positive feedback mechanisms that constitute path dependence at different analysis levels and clarify the relationship between positive feedback and increasing returns we show that path dependent processes that is processes driven by positive feedback that veer toward rigidity or lock in can be but do not have to be found under many labels including structural inertia coevolution or institutional persistence we conclude that a precise definition of path dependence does not need to be at odds with the concept s widespread use in understanding organizational and industrial development processes copyright 2013 the author 2012 published by oxford university press on behalf of associazione icc all rights reserved oxford university press

inefficient standard adoption inertia and momentum revisited i introduction since the establishment of the theory of network effects economists have been concerned with the question of whether a market with network effects will tend to settle on the socially optimal standard it has been postulated that markets may exhibit excess inertia once a technological standard is in place a new superior standard may not displace it because of installed base effects alternatively markets may exhibit excess momentum consumers may adopt a new standard too quickly ignoring the stranding effect they are having on previous users similar issues arise in the adoption of language and social norms the literature has investigated various conditions under which one of these inefficiencies arises such inefficiencies are of particular concern for open technologies such as the qwerty and dvorak keyboards 1 the situation is somewhat different when individual firms own standards in that case a simple argument seems to indicate that there is no possibility that an inefficient standard will persist if a new standard is superior in any objective sense there are gains to be made from switching to it once the standard has been adopted the firm can appropriate these gains therefore the firm has incentive to lower the initial price enough to induce adoption of the standard the preceding argument is made in liebowitz and margolis 1999 and repeated in spulber 2002 spulber expresses a general skepticism about the likelihood of inefficiencies when property rights are defined and markets exist critics might claim that previous models that imply inefficient standard adoption are unrealistic in some way and that if such models were modified slightly the inefficiency would disappear i reconsider the issue of inefficient standard adoption using a parsimonious yet compelling model assuming only that there are successive generations of finitely lived consumers that preferences are heterogeneous and that there are network effects among users adoption decisions can be inefficient this is true even if consumers can coordinate efficiently within a generation and a firm can act as a coordinating device across generations the model presented here generates some of the same results found in other papers collectively but in a more general setting and with more robust results if there is an established standard and a superior alternative emerges no single generation of consumers will be willing to switch to the new standard if the switching cost the loss of network benefit from breaking with past users is too high it may be that the benefits to future generations of consumers are large enough that from a social standpoint it would be efficient for one generation to adopt the new standard even if it is privately optimal for that generation to retain the old standard on the other hand the current generation considers only its own switching cost and not the cost it imposes on the previous generation leading to potential overadoption of new technology even for proprietary standards it is not clear that the incentive of the firm to induce adoption matches the social incentive in particular if consumer preferences are heterogeneous the firm will not be able to price in such a way to extract all of the additional surplus gained from the new standard on the other hand the firm will be able to appropriate some of the surplus generated by the network effect itself which is present for any standard and thus does not affect the social incentive to change standards it is not possible to address this issue with a two period model as in some of the previous literature see for example choi 1994 choi and thum 1998 katz and shapiro 1986 if a new technology is introduced in the second period but then the game ends the welfare of future generations of consumers is neglected 2 this article also differs from previous infinite horizon models of technology adoption

maize milling market reform and urban food security the case of zimbabwe abstract government policy in much of eastern and southern africa has encouraged the development of highly centralized large scale milling facilities which has in turn promoted the consumption of highly refined and expensive maize meal compared to that produced by small scale hammer mills policies to develop competitive small scale milling facilities in urban areas are apparently neglected because of the conventional perception in eastern and southern africa that urban consumers strongly prefer the refined industrially milled meals and are not responsive to price differences between various types of maize meals results of consumer and miller surveys in zimbabwe call into question the validity of these perceptions simulation analysis also indicates that the elimination of policy constraints that block small scale millers access to grain would reduce overall marketing costs thereby allowing higher producer prices lower consumer prices and or lower government subsidies the case of zimbabwe suggests that market reform may considerably reduce the magnitude of the tradeoff between governments food security and budget minimization objectives

grain marketing regulations impact on peasant production in ethiopia abstract during the past 10 years ethiopia has established an elaborate system of trade restrictions producer quotas and fixed producer prices for purchasing a substantial proportion of peasants marketable surplus recent evidence suggests that the quotas are inequitably allocated among areas and that low fixed prices reduce farmer incomes incentives to use improved inputs and grain production regulation of marketplaces and interregional grain trade have important negative effects on consumers producers and the national economy by increasing grain prices the state can stimulate production and ensure adequate supplies of grain without the need for compulsory quotas relaxing the restrictions on marketplaces and on interregional trade can benefit farmers consumers and the national economy with few costs

social status entry and predation the case of british shipping cartels 1879 1929 the authors incorporate social status and regional affiliation two variables of central sociological interest into an economic analysis of entry and predation they build on scott morton s 1997 examination of entry and predation in the merchant shipping industry and examine whether the social status of an entrant owner impacts on the predation behavior of the incumbent cartels they find that high social status entrants are significantly less likely 40 to be preyed upon than the low social status entrants they discuss several interpretations of this result subsequent analysis supports the hypothesis that cartel members use social status as an indicator of an entrant s propensity to be a cooperative cartel participant

on the valuation of american call options on stocks with known dividends both the roll and the geske equations for the valuation of the american call option on a stock with known dividends are incorrectly specified this note presents the corrected valuation formula explains the misspecifications and provides a numerical example

imperfect competition in agricultural markets evidence from ethiopia abstract drawing upon unique transaction level data from rural ethiopia this paper tests for general forms of imperfect competition among rural wholesale traders these are key to the grain distribution system as they purchase from farmers and perform interregional trade tests show that traders in a typical source market engage in imperfectly competitive behavior in purchasing from farmers driving down the price paid to farmers approximately 3 in contrast there is no conclusive evidence of imperfect competition among traders in the larger more centrally located market studied thus efficiency losses due to market structure are likely to be greatest in markets which also have poor road links and lesser volumes of marketed grain

network effects and environmental externalities do clean technologies suffer from excess inertia abstract we study the diffusion of a clean substitute to a dirty durable in a dynamic model consumer utility of both durables increases in their respective market shares due to network effects first we characterize the optimal dirty good tax the tax should achieve a long run optimal division of the market between the two goods along the transition path to this steady state the optimal tax depends on the current and future market shares of the clean durable thus even if the marginal environmental damage from an additional dirty durable is constant the optimal tax should not be constant second we study whether excess inertia can occur if the emission tax is not optimally set we then find that a constant tax that only accounts for the environmental damage caused by the dirty good may lead to excess inertia excess inertia could happen even if the clean technology is proprietary and the technology owner has incentives to sponsor the initial market diffusion of the technology

technology choice and timing with positive network effects abstract when two competing and incompatible products coexist in a market potential users face a choice between the two products and the alternative of deferring the decision this paper examines the choice between the two substitutes where each one is subject to a positive network effect that is a user of one of the products experiences an increase in the value for each additional person using the same product we examine this buy or wait problem either for an individual or a manager making the investment on behalf of a firm by formulating and analyzing a decision theoretic model to model the stochastic evolution of market share we build on the generalized polya urn of arthur et al arthur w b ermoliev y m kaniovski y m 1987 path dependent processes and the emergence of macro structure european journal of operational research 30 3 294 303 allowing for composition of the market to affect not just the relative market shares but also the absolute growth rate of the market we show that the optimal strategy is defined by a pair of market penetration thresholds that depend on the market composition looking at the effect of the network effects on the optimal strategy we find that more pronounced network effects can either raise or lower the penetration thresholds

hardware quality vs network size in the home video game industry abstract this paper analyzes competition between multiple proprietary and incompatible hardware systems when indirect network effects are present and software is provided competitively by third party developers a discrete choice demand structure is employed within a game theoretic setting to allow for a continuum of market share possibilities empirical evidence supports the claim that excess inertia is not a pervasive problem two data sets covering the life of the home video game industry yearly from 1976 to 2003 and monthly january 1995 to october 2007 yield three main results 1 market share is 11 4 times more sensitive to hardware quality than network size 2 the number of available games is 3 69 times more sensitive to hardware quality than network size and 3 hardware quality has a larger impact than network size on the probability of hardware success

preying for monopoly the case of southern bell telephone company 1894 1912 focusing on the southern bell telephone company we propose a modified version of the predation hypothesis to explain bell s natural monopoly over local telephone service southern bell effectively eliminated competition through a strategy of pricing below cost in response to entry which deprived competitors of the cash flow required for expansion even if it failed to induce exit investing in toll lines ahead of demand isolating independent companies in smaller towns and rural areas and forcing them to consolidate on favorable terms and influencing local regulatory policy in large cities to weaken rivals and ultimately to institutionalize the bell monopoly

rationalizability learning and equilibrium in games with strategic complementarities we study a rich class of noncooperative games that includes models of oligopoly competition macroeconomic coordination failures arms races bank runs technology adoption and diffusion r d competition pretrial bargaining coordination in teams and many others for all these games the sets of pure strategy nash equilibria correlated equilibria and rationalizable strategies have identical bounds also for a class of models of dynamic adaptive choice behavior that encompasses both best response dynamics and bayesian learning the players choices lie eventually within the same bounds these bounds are shown to vary monotonically with certain exogenous parameters we study the class of noncooperative supermodular games introduced by topkis 1979 and further analyzed by vives 1985 1989 who also pointed out the importance of these games in industrial economics supermodular games are games in which each player s strategy set is partially ordered the marginal returns to increasing one s strategy rise with increases in the competitors strategies so that the game exhibits strategic complementarity 2 and if a player s strategies are multidimensional marginal returns to any one com ponent of the player s strategy rise with increases in the other components this class turns out to encompass many of the most important economic applications of noncooperative game theory in macroeconomics diamond s 1982 search model and bryant s 1983 1984 rational expectations models can be represented as supermodular games in each of these models more activity by some members of the economy raises the returns to increased levels of activity by others in oligopoly theory some models of bertrand oligopoly with differentiated products qualify as supermodu lar games in these games when a firm s competitors raise their prices the marginal profitability of the firm s own price increase rises a similar structure is present in games of new technology adoption such as those of dybvig and spatt 1983 farrell and saloner 1986 and katz and shapiro 1986 when more users hook into a communication system or more manufacturers adopt an interface standard the marginal return to others of doing the same often rises similarly in some specifications of the bank runs model introduced by diamond and dybvig 1983 when more depositors withdraw their funds from a bank it is more worthwhile for other depositors to do the same in the warrant exercise

obtaining strategic advantage from being imitated when can encouraging clones pay an important business strategy research theme concerns finding ways to minimize competition faced by the firm this paper however focuses on a different set of situations the model developed suggests that an innovator s best strategy may be to encourage clones of its product when a network externality is present key factors to consider in assessing whether encouraging cloning is the innovator s best strategy are 1 the benefit to be derived in terms of added user base contributed by the clone sales traded off against 2 the unit sales that will be lost to the clones these factors in turn depend upon the strength of the network effect and the degree to which the innovator s product quality is perceived by consumers to be superior to the clone s the model further suggests that both the innovator and clone earn their highest payoffs when the clone takes the lead in price setting i e when the clone establishes its own price by considering for each price it might set how the innovator will react to that price and the innovator as price follower responds to the price the clone chooses the paper demonstrates that the clone leader innovator follower situation represents the unique nash equilibrium in price setting strategies a central implication is that when operating in a network externality environment instead of a problem to be avoided clones may be valuable assets to an innovating firm building up the user base for the innovator s technology by bringing lower valuing consumers into the market which in turn makes the innovator s product more attractive to high and medium valuing purchasers thus when the above described conditions hold being cloned can be more profitable for an innovating firm than dominating the market alone

marketing maize and tef in western ethiopia implications for policies following market liberalization abstract ethiopia has recently eliminated fixed grain prices and has reduced its role in purchasing grain from farmers results indicate that private sector marketing of maize and tef is characterized by high risks and variable gross margins returns from storing grain for later sale can be high but predicting price movements is risky interspatial arbitrage is seriously flawed correlations in prices between markets range from weak to strong the government s restriction of the movement of grain and market interventions during the survey period are partly responsible for these trends proposed measures to improve marketing performance include 1 improving feeder roads 2 providing credit to traders and transporters 3 improving farm level maize storage facilities and 4 permitting markets in an area to be held on different days of the week

on the interplay of informational spillovers and payoff externalities this thesis consists of four independent essays which consider different topics in information economics and political economy the first two papers are variants of the same idea an uninformed principal e g a government will make a decision in order to gain more information it may consult two experts however these experts have a private interest in certain policies being implemented the question is to gain as much information as possible should the principal consult experts who are biased in the same direction or experts who prefer different decisions the main result is that as long as collusion between experts can be prevented homogeneous panels are superior to heterogeneous ones and this advantage increases with the experts informational precision in the third paper two firms consider entry in a new product market and must decide when to enter the market and how to design their product firms do not know for certain what the best design is so both firms want to outwait the other s decision in order to gain more information the focus of the paper is on which firm will make the first decision the main result is that if products are strong strategic substitutes the worst informed firm makes the first decision in equilibrium the analysis should apply to a range of other contexts such as investors trading decisions or the policy choices of political candidates the final paper asks the following question could it be that parties in a two party system may benefit from using several candidates in the same election to promote the use of multiple candidates i assume that a party never runs the risk of having its votes split up among its candidates despite this it turns out that parties have a strong incentive to restrict their number of nominees paradoxically it seems that the more uncertain parties are about voter opinion the fewer candidates they want to use in particular with a uniform voter distribution the optimal number of candidates is one

optimal patenting and licensing of financial innovations recent court decisions starting with the state street decision in 1998 allow business methods to be patentable and now give financial institutions the option to seek patent protection for financial innovations this new patentability paradigm and the heterogeneity of characteristics associated with financial innovations pose an immediate decision problem for senior management what to patent we present a parsimonious decision framework that answers this question we show that for innovations with certain characteristics it is optimal not to patent even if the option of patenting and licensing is available our model emphasizes the role of embedded real options that arise from certain types of financial innovations the model provides an explanation of observed patenting behavior of financial institutions and the success of a wide class of innovations including swaps credit derivatives and pricing algorithms

on market integration and liberalisation method and application to ethiopia the article suggests further improvements in the methodology to analyse market integration it provides corrections to and methodological extensions of recent work in this journal it also presents a way of applying market integration techniques to the analysis of shocks such as market liberalisation and war the method is applied to the effects of liberalisation and the end of the civil war on food markets in ethiopia the conclusion is that liberalisation had important effects on the long run and short run integration of food markets