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

nash cournot or lindahl behavior an empirical test for the nato allies this paper derives systems of demand equations for distinguishing between nash cournot and lindahl behavior in a group that either shares a pure public good or an activity that provides a private and a pure public joint product systems of simultaneous equations are estimated based upon nash cournot and lindahl behavior for a sample of ten nato allies for the 1956 1987 period nonnested hypothesis tests support the nash cournot specification for five of the ten sample allies no evidence of lindahl behavior is found the nash cournot joint product specification outperforms the pure public model for all sample allies

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

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

changing threat perceptions and the efficient provisioning of international security this paper proposes a mechanism for structuring international institutions to efficiently provision global security against the threat of a rogue nation the effects of security effort by an alliance member are assumed to be non rival and non excludable for other members specifically this effort has both positive and negative effects as security measures prevent attacks by the rogue nation but also involves loss of commercial and diplomatic benefits further the alliance members are assumed to have heterogeneous tastes regarding the desired security level the allies act strategically vis a vis one another with regard to security provision and the alliance a whole acts strategically with respect to the rogue nation which strategizes in turn importantly this paper investigates how the evolution of public opinion in the respective countries facing the rogue nation s threat impacts the proposed mechanism

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

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

credible spatial preemption it is often argued that incumbent firms may deter entry by preemptive investment in new goods we show that these conclusions are reversed when multiproduct incumbentfirms may exit in response to entry once entrants are in an industry an incumbent will often want to withdraw some goods to prevent competition with the entrant from reducing profits on other goods such a reaction makes entry more attractive to a potential entrant the equilibrium industry structure is less likely to be monopolistic as the goods are better substitutes as exit costs are low and as the competition between producers of the same good is more intense

the strategic advantage of being less skilled abstract ability need not pay if public goods are financed by voluntary contributions this result first shown for exogenously given income is reinforced if income is endogenously generated in equilibrium welfare of complete free riders is ranked according to their wage rate whereas for contributors a higher productivity is disadvantageous furthermore it can be shown that the set of contributors consists of the skilled agents and only the less productive will act as complete free riders this results in a strong incentive for being less skilled

herding with and without payoff externalities an internet experiment most real world situations that are susceptible to herding are also characterized by direct payoff externalities yet the bulk of the theoretical and experimental literature on herding has focused on pure informational externalities in this paper we experimentally investigate the effects of several different forms of payoff externalities e g network effects first mover advantage etc in a standard information based herding model our results are based on an internet experiment with more than 6000 subjects of which more than 2400 participated in the treatments reported here including a subsample of 267 consultants from an international consulting firm we also replicate and review earlier cascade experiments finally we study reputation effects i e the influence of success models in the context of herding

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

brokerage pricing under competition abstract this paper reexamines the popular assumption that real estate commissions are fixed over time it shows how the competitively determined commission rate responds to changes in the housing market and broker cost conditions one testable implication is that competition promotes counter cyclical changes in the commission rate the empirical analysis of commission rate determinants using data covering an entire urban housing market through its downturn and expansion phases reveals the counter cyclical movement in commission rates predicted by the competitive model

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

boom and gloom we study the performance of investments made at different points of an investment cycle we use a large data set covering hotels in the united states with rich details on their location characteristics and performance we find that hotels built during hotel construction booms underperform their peers for hotels built during local hotel construction booms this underperformance persists for several decades we examine possible explanations for this long lasting underperformance the evidence is consistent with information based herding explanations

the theory of public goods non nash behaviour abstract most treatments of equilibrium public goods provision assume zero conjectural variations in the sense that each individual regards the behaviour of the rest of the community as independent of his own this paper introduces nonzero conjectural variations into the model a diagram is introduced which can depict both the individual s and the community s equilibrium in the presence of nonzero conjectural variations equilibrium and optimal outcomes are compared and a specific functional form is used to investigate the effect of community size on the nature of equilibrium finally we discuss the requirement that conjectures should be consistent

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

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

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

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

gorman and musgrave are dual an antipodean theorem on public goods abstract this paper examines the conditions under which the allocation branch of the government can determine the optimum provision of public goods independently of the distribution of private goods we draw attention to the duality with the literature on aggregation over consumers private goods economies

learning and capacity expansion under demand uncertainty a competitive dynamic model of entry into a new industry is set up and both its positive and normative aspects are studied the main assumptions are that entry is sequential that it occurs under imperfect information on the size of the market and that better information becomes available as time goes on the gradual improvement in information is due to the fact that later waves of entrants are able to observe the profitability of earlier entrants the major results reported here under suitable restrictions are that the equilibrium rate of entry is monotonically decreasing over time and that at any given point in time it is smaller than the socially optimal one when a new market opens as a result of a product being newly invented for instance or when an existing market starts to expand uncertainty with respect to its size is likely to prevail as a result of this uncertainty entry of firms into such markets typically will occur in waves some firms will enter initially while others will wait to see the consequences of that initial entry if the experience of early entrants is favourable entry will continue otherwise entry will cease hence with the introduction of a new product two phases are associated the growth phase typified by positive operating profits for existing firms and expansion of productive capacity due to entry of new firms and the mature phase typified by erosion of profits and fixed total productive capacity empiricists estimating the time pattern of investments during the growth phase have found an s shaped diffusion curve see mansfield 1986 and gort and klepper 1982 the purpose of the present paper is to theoretically characterize these time patterns and to investigate their welfare properties any attempt to model the type of entry described above must account for differences in both entry dates and resultant earnings in other words the theory must explain why the realized earnings of different cohorts of firms are not equal often such ex post differences are reconciled by assuming heterogeneity with respect to some latent underlying characteristic managerial ability for instance and attributing differences in earnings to differences in that characteristic in this paper instead earning differentials are attributable to luck only ex ante all firms are technologically identical and equally capable of forecasting market prospects and rationally acting upon those forecasts ex post some firms turn out to have entered at the right time and are for that reason more profitable the model developed in this paper analyzes a parametric example of a sequential entry problem in which the uncertainty over market size is gradually resolved over time in a bayesian setting in an environment of perfect competition and constant returns toscale a free entry equilibrium concept is introduced and the aggregate implications of the time path of investments are derived i then compare this actual time path to the optimum this comparison is interesting because the equilibrium is analysed under the

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

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

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

learning and payoff externalities in an investment game abstract this paper examines the interplay of informational and payoff externalities in a two player irreversible investment game each player learns about the quality of his project by observing a private signal and the action of his opponent i characterize the unique symmetric equilibrium in a timing game that features a second mover advantage allowing for arbitrary correlation in project qualities despite private learning the game reduces to a stochastic war of attrition in contrast to the case of purely informational externalities all investments happen at the same real time instant irrespective of the sign of the correlation and beliefs never get trapped in a no learning region provided that the second mover advantage is sufficiently high

first versus second mover advantage with information asymmetry about the profitability of new markets is it better to move first or second to innovate or to imitate we show that if one player s information about the profitability of new markets is only modestly superior the possibility of foreclosing the market can lead to a first mover advantage on the other hand more extreme information superiority can reverse this leading to a second mover advantage knowing more surely what is the best choice the better informed player wants to delay to keep his information private and the less informed player wants to delay to learn because of this more accurate information can actually lead to inefficiency by increasing the incentive to delay and exogenous costs of delay can aid efficiency by neutralizing that strategic incentive in fact in some circumstances a player may purposely coarsen his information to deter imitation

economic models of nato abstract the seminal work of olson and zeckhauser 1966 on the economic theory of alliances in particular nato provides the theoretical background for this paper after restating their results on alliance allocation behavior in a formal framework we show that these results may fail in a context with decentralized production of the public defense commodity finally we introduce a simple mechanism which allows the implementation of an efficient allocation characterized by proportional burden sharing and cost monotonicity these results can also be applied to other public goods problems

endogenous timing of actions under conflict between two types of second mover advantage in a model two players heterogeneous in their information quality compete with each other with perfect information about the other player s information quality if they can decide their timings of actions endogenously the less informed player has an incentive to delay her action for learning on the other hand the more informed player wants to delay her action to prevent her information from being revealed not to enable her to learn the consict of these two types of second mover advantages yields a war of attrition although both players can bene t from acting as the follower the gain from a delay for learning is greater than that for preventing the other s learning therefore a cost for the delay in action plays an important role in characterizing the equilibrium in contrast to the literature in which only informational externalities are considered this article shows that the introduction of payoff externalities contributes to different procedures and reasoning processes through which the heterogeneous players timings of actions are decided endogenously

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

decentralization duplication and delay we argue that although decentralization has advantages in finding low cost solutions these advantages are accompanied by coordination problems which lead to delay or duplication of effort or both consequently decentralization is desirable when there is little urgency or a great deal of private information but it is strictly undesirable in urgent problems when private information is less important we also examine the effect of large numbers and find that coordination problems disappear in the limit if distributions are common knowledge

complementarity free riding and the military expenditures of nato allies abstract this paper examines the major influences of an ally s demand for military expenditures demand equations are estimated for a sample of nato nations using the iterative seemingly unrelated regressions technique evidence is presented indicating that structural changes occured in these equations in the early 1970s this instability is the predicted effect of the doctrine of flexible response adopted by nato during this time period the statistical tests show that the medium sized nuclear powers military expenditures responded identically to income and defense spillins the same held true for the lowland allies

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

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

alternative collective goods models of military alliances theory and empirics i introduction in a seminal article mancur olson and richard zeckhauser 1966 characterized the north atlantic treaty organization nato in the mid 1960s as a group of allies who shared a pure public good in the form of deterrence to qualify as a pure public good a good s benefits must be nonexcludable i e available to all group members once provided and nonrival in consumption i e consumption opportunities associated with a unit of the good do not decline with the number of users pure public goods are characterized by free riding behavior owing to non excludability which permits individuals to partake in the benefits of the good without expending their own scarce resources olson and zeckhauser also demonstrated that a pure public good such as deterrence is associated with an exploitation hypothesis whereby the large agents allies shoulder the payment burdens of the small agents allies using data from 1964 olson and zeckhauser 1966 274 77 established that defense burdens are positively correlated with the economic size of the allies as measured by gross national product gnp over the next twenty five years a large literature has generalized and extended the olson and zeckhauser collective goods theory of alliances van ypersele de strihou 1967 recognized that defense expenditures could generate country specific private benefits e g disaster relief protection of colonies management of domestic unrest along with purely public deterrence with the presence of ally specific benefits the strength of the exploitation hypothesis is attenuated since a small ally might willingly shoulder a relatively large burden provided that this ally views its defense expenditures as possessing a large share of nation specific benefits in a series of articles murdoch sandler and others 1 formulated a joint product model in which the military activity of an ally yields pure public impure public and or private jointly produced outputs or benefits if the benefits derived from the allies military expenditures were from a single purely public good then the joint product model would obviously degenerate to the model of olson and zeckhauser 1966 murdoch and sandler 1984 sandler and forbes 1980 and sandler and murdoch 1990 have shown that the joint product model outperforms the pure public good deterrence model for nato during various time periods in recent years a number of important contributions to the collective good analysis of alliances have appeared these include the inclusion of foreign trade considerations wong 1991 marginal cost differentials among allies mcguire 1990 weber and wiesmeth 1991 leader follower behavior bruce 1990 and median voter considerations dudley and montmarquette 1981 murdoch sandler and hansen 1991 and okamura 1991 mcguire and groth 1985 engineered an econometric procedure for distinguishing between allocative processes e g non cooperative and cooperative within an alliance while subsequent work by sandler and murdoch 1990 operationalized this econometric procedure until now collective good models of alliances have computed alliancewide defense levels by simply summing the allies expenditures however the appropriate manner for aggregating defense efforts among allies may depend on geographical strategic and technological determinants for example the defense efforts of the weakest ally or link along a front may determine the strength of the allies defenses since the enemy s ability to penetrate behind the front hinges on the weakest fortification hirshleifer 1983 in consequence the minimal defense level of the allies and not the sum determines alliance capabilities the purpose of this paper is fivefold first we intend to look at different methods of aggregating allies military expenditures to determine alliancewide defense levels three procedures summation weakest link and best shot are examined

what is the role of the asking price for a house abstract this paper considers the role of the asking price in housing transactions both theoretically and empirically significant fractions of housing transactions involve sales prices that are either below or above asking price which might suggest that asking price has limited relevance however many housing transactions involve a sales price exactly equal to asking price a fact that has previously drawn little notice strongly suggesting that asking price does matter the paper develops a model where asking price is neither a binding commitment nor a ceiling yet still directs buyer search and impacts sales price using novel survey data the paper provides empirical evidence consistent with asking price playing a directing role in buyer search consistent with theory this effect is stronger for more atypical houses and in bust markets

a theory of exit in duopoly we develop a duopoly model in which exit occurs because of the existence of fixed costs or opportunity costs each firm enters the market knowing its own cost but not that of its opponent as times goes on each firm becomes increasingly pessimistic about the cost of its remaining rival the time of exit is the only strategic variable so that our model is a war of attrition in contrast to the classic war of attrition however we assume that with positive probability each firm s costs may be low enough that staying in forever is a dominant strategy thus our model unlike the classic one has a unique equilibrium

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

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

endogenous sequencing of firm decisions abstract when firms are symmetrically informed a stackelberg leader prefers to be leader rather than a cournot duopolist however when the leader has superior information about demand the leader may earn lower ex ante profits than it would earn if it was choosing quantities simultaneously with the follower in this paper i give the firm with superior information the option of delaying its quantity decision until the decision period of the less informed firm so that decisions are made simultaneously surprisingly in the unique stable outcome the informed firm moves first regardless of its private information journal of economic literature classification numbers c72 c73 d82 l10

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

testing cost inefficiency under free entry in the real estate brokerage industry this article provides an empirical framework for studying entry and cost inefficiency in the real estate brokerage industry we present a structural entry model that exploits individual level data on entry and earnings to estimate potential real estate agents revenues and reservation wages thereby recovering costs of providing brokerage service using u s census data we estimate the model and find strong evidence for cost inefficiency under free entry attributable in particular to wasteful nonprice competition we further use the estimated model to evaluate welfare implications of the rebate bans that currently persist in some u s states supplemental materials are provided online

determinants of bargaining outcome in single family housing transactions an empirical examination using a hedonic regression model this paper examines determinants of bargaining outcome in single family housing transactions it divides potential factors into three broad categories dwelling attributes site amenities and seller s and buyer s characteristics results with use of 1990 data for the reno sparks area in nevada show that bargaining outcome is determined by seller s asking price buyer s household income and some of the dwelling attributes and site amenities this paper concludes that factors affecting housing price do not necessarily affect bargaining outcome and first time home buyers do not statistically bargain less than repeat home buyers

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

the demand for military expenditures an international comparison earlier studies have explained inter country variations in the share of gnp devoted to military expenditures by international spillovers and by differences in the threat of attack related to relative incomes in this paper we use the theory of public choice to explain these differences we attempt to measure the importance of both international spillovers and relative incomes along with two other factors the tax price elasticity of demand and economies of scale in the consumption of security we find that international spillovers are significant and positive that the income elasticity of demand is greater than unity that the tax price elasticity of demand explains part of observed inter country differences and that there are considerable economies of scale in the consumption of military spending finally between 1960 and 1975 there was apparently a substantial increase in the value which each country derived from a dollar of military spending by its allies this phenomenon which seems related to the increased importance of deterrent weapons has tended to induce individual alliance members to reduce the share of their national income devoted to defense

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

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

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

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

an empirical stationary equilibrium search model of the housing market this article specifies and estimates a computationally tractable stationary equilibrium model of the housing market the model is rich and incorporates many of its unique features buyers and sellers simultaneous search behavior heterogeneity in their motivation to trade transaction costs a trading mechanism with posting prices and bargaining and the availability of an exogenous advertising technology that induces endogenous matching estimation uses maximum likelihood methods and multiple listing services data the estimated model is used to simulate housing market outcomes when a the amount of information displayed on housing listings increases and b real estate agent s commission rates change

progression under the benefit approach to the theory of taxation abstract the implications for progression of the benefit approach to the theory of taxation are studied in this paper it is concluded that the case for progression rests on the degree of substitutability between public and private goods

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

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

egalitarian equivalent cost sharing of a public good in an economy with one public and one private good egalitarian equivalent cost sharing consists of finding the highest public good level x such that consuming x for free yields a feasible utility distribution the corresponding feasible allocation typically unique called egalitarian equivalent is in the core of the economy conversely any cost sharing method satisfying pareto optimality cost monotonicity nobody suffers a utility loss if the production technology improves upon ceteris paribus and individual rationality no single agent coalition objects or no private transfers no agent receives a positive amount of private good must select an egalitarian equivalent allocation in every economy copyright 1987 by the econometric society

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

asymmetric information information externalities and efficiency the case of oil exploration in this article we examine the efect of private information and information externalities on the ex post eficiency of investment in oil exploration we show that too much drilling tends to occur ifjirms believe that the area is likely to contain a sizeable pool of oil and too little drilling occurs if the opposite is true bargaining with well defined property rights to the information externality can eliminate underinvestment but overinvestment remains a problem because firms have an incentive not to disclose their private information

strategic delay and the onset of investment cascades i study the phenomenon of herd behavior in a framework where agents can endogenously choose both the actions and the timing of their actions i assume that agents may have privately known quality and content of information a unique symmetric equilibrium in pure strategies is proved to exist and characterized in its closed form an investment cascade always occurs in the equilibrium and a strategic delay is shown to exist before the sudden onset of the investment cascade i also examine the loss of welfare from delay and information cascade

impact of bayesian learning and externalities on strategic investment we investigate the interplay between learning effects and externalities in the problem of competitive investments with uncertain returns we examine a game theoretic duopoly investment model in which i a firm can learn about the profitability of the investment by observing the performance of the first mover and ii externalities exist between the investments of two firms we find a region of a war of attrition between the two firms in which the interplay between externalities and learning gives rise to counterintuitive effects on investment strategies and payoffs in particular we find that contrary to the conventional war of attrition where an increase in benefits for the follower generally delays the first move an increase in the rate of learning which tends to benefit the follower can hasten the first investment this paper was accepted by james smith decision analysis

structuring international institutions for the efficient provisioning of global security this paper analyzes the issue of security provision by an alliance against the threat of a rogue nation proactive security effort by an alliance member is assumed to be non rival and non excludable so the results of the effort jointly accrue to every other member this effort has both positive and negative effects as security measures mitigate the threat but also involve loss of commercial benefits collateral damages and infringement on human rights in this paper i suggest an institutional structure for the alliance which would lead to the achievement of the efficient level of world security through multilateral participation

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

two stage perfect equilibrium in hotelling s model hotelling i 929 suggests that his spatial competition model can be used to describe a wide range of differentiation problems he points to the selection of product variety within an industry as a potential application most of the subsequent work in his tradition has taken the equivalence of the two problems for granted in this note we look more closely at this equivalence we distinguish between two types of differentiated products according to the variety of preferences assumed with respect to those products building on this distinction we recognize that the demand faced by a firm locating on hotelling s line is analogous to the demand faced by a firm selecting a horizontally differentiated product it should be emphasized thus that the equivalence between the geographical and the product selection problem is by no means general and relies on specific assumptions about consumers preferences next we formulate a small model close to hotelling s one in which firms select a horizontally differentiated product within this model it will be shown that a pure strategy price equilibrium exists for every pair of products this statement is to be contrasted with the results of d aspremont et al i979 who have shown that in the original hotelling s setting an equilibrium fails to exist when firms are too close together 1 in addition we will examine the product selection problem faced by firms in a two stage game in the first stage each firm selects a product in the second stage the firm defines a price for its product we will seek the existence of a perfect equilibrium in this game a perfect equilibrium in this context can be viewed as a nash equilibrium in a game in which firms select a product aware of the non cooperative price equilibrium that will occur for each of their choices it will be shown that contrary to hotelling s principle the two firms will maximise their differentiation i e firms will locate at opposite ends of the market

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