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Abstract:
We discuss issues of the application of antitrust law and regulatory rules to network industries. In assessing the application of antitrust in network industries, we analyze a number of relevant features of network industries and the way in which antitrust law and regulatory rules can affect them. These relevant features include (among others) network effects, market structure, market share and profits inequality, choice of technical standards, relationship between the number of active firms and social benefits, existence of market power, leveraging of market power in complementary markets, and innovation races. We find that there are often significant differences on the effects of application of antitrust law in network and non-network industries.

networks, network effects, public policy, antitrust, telecommunications, technical standards

Abstract:
This paper analyzes the law and economics of United States v. Microsoft, a landmark case of antitrust intervention in network industries. The United States Department of Justice and 19 States sued Microsoft alleging (i) that it monopolized the market for operating systems of personal computers and took anti-competitive actions to illegally maintain its monopoly; (ii) that it attempted to monopolize the market for Internet browsers because such browsers would create competition for operating systems; (iii) that it bundled its browser (Internet Explorer) with Windows; and that it engaged in a number of other anti-competitive exclusionary arrangements with computer manufacturers, Internet service providers, and content providers attempting to thwart the distribution of Netscape's browser. The District Court Judge found in most points for the plaintiffs and ordered the breakup of Microsoft into two companies, one with all the operating systems software, and one with all other products of the company. The District Court also imposed a number of severe restrictions on the business conduct of Microsoft. We analyze the economic issues related to liability. We also analyze the applicability and effectiveness of the remedies imposed by the District Court and contrast them with other potential remedies.

Antitrust, Microsoft, networks, network externalities

Abstract:
This paper examines the justifications, history, and practice of regulation in the US telecommunications sector. We examine the impact of technological and regulatory change on market structure and business strategy. Among others, we discuss the emergence and decline of the telecom bubble, the impact on pricing of digitization and the emergence of Internet telephony (VOIP). We also examine the impact of the 1996 Telecommunications Act on market structure and strategy in conjunction with the history of regulation and antitrust intervention in the telecommunications sector. After discussing the impact of wireless technologies, we conclude by venturing into some short term predictions. We express concern about the derailment of the implementation of the 1996 Act by the aggressive legal tactics of the entrenched monopolists (the local exchange carriers), and we point to the real danger that the intent of Congress in passing the 1996 Act to promote competition in telecommunications will never be realized in local telecommunications in the fashion that the 1996 prescribed. The decision of AT&T to stop marketing both long distance and local services to residential customers is a direct result of the derailing of the 1996 Act that has allowed the local service monopolists (i) to enter long distance while the local market was still monopolized; and (ii) to leverage their monopoly power in the local market to the long distance market. We also discuss the wave of mergers in the Telecommunications and cable industries, the telecom meltdown of 2000-2003, and issues that arose from the triennial review by the FCC of implementation of the 1996 Act.

telecommunications, regulation, competition, monopoly, oligopoly, Internet, broadband, DSL, unbundling

Abstract:
We analyze the salient features of networks and point out the similarities between the economic structure of networks and the structure of vertically related industries. The analysis focuses on positive consumption and production externalities, commonly called network externalities. We discuss their sources and their effects on pricing and market structure. We distinguish between results that do not depend on the underlying industry microstructure (the macro approach) and those that do (the micro approach). We analyze the issues of compatibility, coordination to technical standards, interconnection and interoperability, and their effects on pricing and quality of services and on the value of network links in various ownership structures. We also briefly discuss the issue of interconnection fees for bottleneck.

networks, compatibility, strategic choice

Abstract:
This study analyzes and contrasts the U.S. and EU antitrust standards on bundling (in its various forms) and tying. The analysis is applied to the U.S. and EU cases concerning Microsoft's practice of integrating (tying) new products (Internet Explorer in the U.S. and Windows Media Player in the EU) with Windows as well as to cases brought in Europe and in the United States on bundled discounts. We conclude that there are important differences between the EC and U.S. antitrust law on the choice of the relevant analogy for bundling and tying (for example, a predatory price test versus an anticompetitive foreclosure test). The two jurisdictions also differ in their interpretations of the requirement for anticompetitive effects, and, in particular, the analysis of foreclosure and consumer harm. It seems that, in Europe, consumer detriment is found more easily under Article 82 of the Treaty of Rome than under the Sherman Act in the U.S., or at least that the standard of proof for consumer harm in the E.U. appears lower. We advocate a unified test for bundling and tying that would focus on anticompetitive foreclosure and absence of objective justifications. The function of the distinct product element of the tying test should be reconsidered and the coercion element of the test should be abandoned.

tying, bundling, foreclosure, requirement contracts, monopolization, Microsoft, predatory pricing

Abstract:
We analyze two- and three-dimensional variants of Hotelling's model of differentiated products. In our setup, consumers can place different importance on each product attribute; this is measured by a weight in the disutility of distance in each dimension. Two firms play a two-stage game; they choose locations in stage 1 and prices in stage 2. We seek subgame- perfect equilibria. We find that all such equilibria have maximal differentiation in one dimension only; in all other dimensions, they have minimum differentiation. An equilibrium with maximal differentiation in a certain dimension occurs when consumers place sufficient importance (weight) on that attribute. Thus, depending on the importance consumers place on each attribute, in two dimensions there is a max-min equilibrium, a min-max equilibrium, or both. In three dimensions, depending on the weights, there can be a max-min- min equilibrium, a min-max-min equilibrium, a min-min-max equilibrium, any two of them, or all three.

Abstract:
We analyze two- and three-dimensional variants of Hotelling's model of differentiated products. In our setup, consumers can place different importance on each product attribute; this is measured by a weight in the disutility of distance in each dimension. Two firms play a two-stage game; they choose locations in stage 1 and prices in stage 2. We seek subgame- perfect equilibria. We find that all such equilibria have maximal differentiation in one dimension only; in all other dimensions, they have minimum differentiation. An equilibrium with maximal differentiation in a certain dimension occurs when consumers place sufficient importance (weight) on that attribute. Thus, depending on the importance consumers place on each attribute, in two dimensions there is a max-min equilibrium, a min-max equilibrium, or both. In three dimensions, depending on the weights, there can be a max-min- min equilibrium, a min-max-min equilibrium, a min-min-max equilibrium, any two of them, or all three.

Abstract:
Technology platforms, such as Microsoft Windows, are the hubs of technology industries. We develop a framework to characterize the optimal two-sided pricing strategy of a platform firm, that is, the pricing strategy towards the direct users of the platform as well as towards firms offering applications that are complementary to the platform. We compare industry structures based on a proprietary platform (such as Windows) with those based on an open-source platform (such as Linux) and analyze the structure of competition and industry implications in terms of pricing, sales, profitability, and social welfare. We find that, when the platform is proprietary, the equilibrium prices for the platform, the applications, and the platform access fee for applications may be below marginal cost, and we characterize demand conditions that lead to this. The proprietary applications sector of an industry based on an open source platform may be more profitable than the total profits of a proprietary platform industry. When users have a strong preference for application variety, the total profits of the proprietary industry are larger than the total profits of an industry based on an open source platform. The variety of applications is larger when the platform is open source. When a system based on an open source platform with an independent proprietary application competes with a proprietary system, the proprietary system is likely to dominate the open source platform industry both in terms of market share and profitability. This may explain the dominance of Microsoft in the market for PC operating systems.

networks, network effects, network externalities, complements, systems, open source software, technology platforms, software industry structure

Abstract:
The Telecommunications Act of 1996 invites entry in the local telecommunications networks whereby entrants will lease parts of the network ("unbundled network elements") from incumbents "at cost plus reasonable profit." A crucial question in the implementation of the Act is the appropriate measure of cost. This paper examines the economic principles on which the cost calculation should be based. I conclude that the appropriate measure of cost (maximizing allocative, productive, and dynamic efficiency) is forward-looking economic cost and not the historical, accounting, or embedded cost of the incumbent's network. In calculating costs, demand and supply uncertainty, as well as the asymmetric position of incumbents and entrants should be taken into account. Close examination of the issue of uncertainty in the local telecommunications network reveals that (i) for most unbundled network elements, there is little demand uncertainty; and (ii) that those elements that face significant uncertainty, do not have sunk value. Thus, the incumbent does not face higher expected cost by investing. Moreover, the rewards of the incumbent can be higher because buyers prefer to buy services from the owner of the network. Finally, strategic considerations in oligopolistic interaction are likely to dominate any uncertainty considerations and will increase the incentive of incumbents to invest.

Abstract:
We discuss salient economic aspects of the Internet, including the possible abolition of net neutrality by local broadband access networks as well as potential incompatibilities and degradation of connectivity in the Internet backbone.

Internet, net neutrality, Internet backbone, collusion, dominance

Abstract:
We discuss net neutrality regulation in the context of a two-sided market model. Platforms sell Internet access services to consumers and may set fees to content - and application providers on the Internet. When access is monopolized, for reasonable parameter ranges, net neutrality regulation (requiring zero fees to content providers) increases the total industry surplus as compared to the fully private optimum at which the monopoly platform imposes positive fees on content providers. However, there are also parameter ranges for which total industry surplus is reduced. Imposing net neutrality in duopoly with multi-homing content providers and single-homing consumers increases the total surplus as compared to duopoly competition with positive fees to content providers.

net neutrality, two-sided markets, Internet, monopoly, duopoly, regulation, discrimination

Abstract:
We discuss the benefits of net neutrality regulation in the context of a two-sided market model in which platforms sell Internet access services to consumers and may set fees to content and applications providers 'on the other side' of the Internet. When access is monopolized, we find that generally net neutrality regulation (that imposes zero fees 'on the other side' of the market) increases total industry surplus compared to the fully private optimum at which the monopoly platform imposes positive fees on content and applications providers. Similarly, we find that imposing net neutrality in duopoly increases total surplus compared to duopoly competition between platforms that charge positive fees on content providers. We also discuss the incentives of duopolists to collude in setting the fees 'on the other side' of the Internet while competing for Internet access customers. Additionally, we discuss how price and non-price discrimination strategies may be used once net neutrality is abolished. Finally, we discuss how the results generalize to other two-sided markets.

net neutrality, two-sided markets, Internet, monopoly, duopoly, regulation, discrimination

Abstract:
This paper analyzes the effects on the implementation of the Telecommunications Act of 1996 ("Act") on US telecommunications markets and is based on my forthcoming book with the same title. The Act is a milestone in the history of telecommunications in the United States. Coming 12 years after the breakup of AT&T, the Act attempts to move all telecommunications markets toward competition. The Act envisions competition in all telecommunications markets, both in the markets for the various elements that comprise the telecommunications network, as well as for the final services the network creates. Building on the experience of the long distance market, which was transformed from a monopoly to an effectively competitive market over the last 12 years, the Act attempts to promote competition in the hitherto monopolized local exchange markets. The Act recognizes the telecommunications network as a network of interconnected networks. Telecommunications providers are required to interconnect with entrants at any feasible point the entrant wishes. Most importantly, the Act requires that incumbent local exchange carriers ("ILECs") (i) lease parts of their network (unbundled network elements) to competitors "at cost"; (ii) provide at a wholesale discount to competitors any service the ILEC provides; and (iii) charge reciprocal rates in termination of calls to their network and to networks of local competitors. Moreover, the Act requires that ILECs that came out of the Bell System meet a number of requirements, including a public interest test, before they may enter into the long distance market. Thus, the Act provides some safeguards against the export of ILEC monopoly power to other parts of the network. Numerous legal challenges to the Act and its implementation have been raised by the ILECs resulting in very slow implementation of the Act, and, in many cases, in no substantial implementation of the provisions of the Act. Thus, more than two years after the passage of the Act, there is very little entry and competition in local exchange markets. In response to the apparent failure of the implementation Act, there has been a wave of mergers in the US telecommunications industry.

Abstract:
The vast majority of US residential consumers face a monopoly or duopoly in broadband Internet access. Up to now, the Internet was characterized by a regime of net neutrality where there was no discrimination in the price of a transmitted information packet based on the identities of either the transmitter or the receiver or based on the application or type of content that it contained. The providers of DSL or cable modem access in the United States, taking advantage of a recent regulatory change that effectively abolished net neutrality and non-discrimination protections, and possessing significant market power, have recently discussed implementing a variety of discriminatory pricing schemes. This paper discusses and evaluates the implication of a number of these schemes on prices, profits of the network access providers and those of the complementary applications and content providers, as well as the impact on consumers. We also discuss an assortment of anti-competitive effects of such price discrimination, and evaluate the possibility of imposition of net neutrality by law.

net neutrality, Internet, price discrimination, vertical restrictions, two-sided pricing, horizontal cooperation, raising rivals¿ costs

Abstract:
Frequently, a monopolist or dominant firm in an input market also sells a complementary product for which the input is indispensable. It is often the case that the monopolist faces significant competition in the complementary goods markets. For example, a LEC is a monopolist in the provision of terminating and originating access for long distance service. If it were presently allowed to offer long distance service, it would be competing with a number of other carriers. In a second important example, Microsoft is dominant in the operating systems market for personal computers and it also sells various applications that require the use of the operating system. In many of the applications markets, such as the market for internet browsers, Microsoft faces significant competition.

This paper shows that the monopolist has incentives (i) to raise the costs of its rivals in the complementary markets; and (ii) to degrade the quality of the monopolized good when this good is combined with complementary goods of its competitors. Such behavior is expected by LECs once they enter the long distance market. Microsoft may also have exhibited such behavior by (i) bundling Internet Explorer with Windows95; and (ii) by seamlessly integrating Internet Explorer 4.0 with Windows Explorer in Windows95 and Windows98.

Abstract:
We discuss the case of a monopolist of a base good in the presence of a complementary good provided either by it or by another firm. We assess and calibrate the extent of the influence on the profits from the base good that is created by the existence of the complementary good. We establish an equivalence between a model of a base and a complementary good and a reduced-form model of the base good in which network effects are assumed in the consumers' utility functions as a surrogate for the presence of direct or indirect network effects, such as complementary goods produced by other firms. We also assess and calibrate the influence on profits of the intensity of network effects and quality improvements in both goods. We evaluate the incentive that a monopolist of the base good has to improve its quality rather than that of the complementary good under different market structures. Finally, based on our results, we discuss a possible explanation of the fact that Microsoft Office has a significantly higher price than Microsoft Windows although both products have comparable market shares

calibration, monopoly, network effects, complementary goods, software, Microsoft

Abstract:
This paper analyzes and compares the investment incentives of platform and application developers for Linux and Windows. We find that the level of investment in applications is larger when the operating system is open source rather than proprietary. The comparison of the levels of investment in the operating systems depends, among others, on reputation effects and the number of developers. The paper also develops a short case study comparing Windows and Linux and identifies new directions for open source software research.

Abstract:
We discuss the incentive of an exclusive holder of a technology to share it with competitors in a market with network externalities. We assume that high expected sales increase the willingness to pay for the good. This is named the "network effect". At a stable fulfilled expectations equilibrium, where the actual sales are equal to the expected ones, it is shown that, if the network effect is sufficiently strong, a quantity leader has an incentive to invite entry and license his technology without charge. If the quantity leader has the opportunity to use lump sum license fees, he will invite a larger number of competitors. If no lump sum fees are allowed, the leader will charge a decreasing fee in the intensity of the network externality and will invite entry. In markets with very strong network externalities, the leader pays a subsidy to the invited followers. We also show that the results hold under uncertainty, and when the post-entry competition is Cournot.

Abstract:
We discuss the incentive of an exclusive holder of a technology to share it with competitors in a market with network externalities. We assume that high expected sales increase the willingness to pay for the good. This is named the "network effect". At a stable fulfilled expectations equilibrium, where the actual sales are equal to the expected ones, it is shown that, if the network effect is sufficiently strong, a quantity leader has an incentive to invite entry and license his technology without charge. If the quantity leader has the opportunity to use lump sum license fees, he will invite a larger number of competitors. If no lump sum fees are allowed, the leader will charge a decreasing fee in the intensity of the network externality and will invite entry. In markets with very strong network externalities, the leader pays a subsidy to the invited followers. We also show that the results hold under uncertainty, and when the post-entry competition is Cournot.

Abstract:
This paper discusses how antitrust law and regulatory rules should be applied to network industries. In assessing the application of antitrust in network industries, we analyze a number of relevant features of network industries and the way in which antitrust law and regulatory rules can affect them. These relevant features include (among others) network effects, market structure, market share and profits inequality, choice of technical standards, relationship between the number of active firms and social benefits, existence of market power, leveraging of market power in complementary markets, and innovation races. We find that there are often significant differences on the effects of application of antitrust law in network and non-network industries.

networks, network effects, public policy, antitrust, telecommunications, technical standards, lock-in, net neutrality, Internet, Microsoft, Trinko

Abstract:
This paper discusses the economics of the Internet backbone. I discuss competition on the Internet backbone as well as relevant competition policy issues. In particular, I show how public protocols, ease of entry, very fast network expansion, connections by the same Internet Service Provider (ISP) to multiple backbones (ISP multi-homing), and connections by the same large web site to multiple ISPs (customer multi-homing)enhance price competition and make it very unlikely that any firm providing Internet backbone connectivity would find it profitable to degrade or sever interconnection with other backbones in an attempt to monopolize the Internet backbone.

Internet backbone, network effects, competition, monopoly, MCI, WorldCom, tipping

Abstract:
A parimutuel market microstructure for contingent claims trading is proposed and analyzed. A parimutuel microstructure is a call auction where relative equilibrium prices of contingent claims are endogenously determined using a specific mechanism. We propose a market microstructure incorporating parimutuel principles which provides for notional derivatives transactions, limit orders, and bundling of contingent claims across states. This microstructure will be used by Longitude Inc.'s clients to transact derivatives on economic statistics, weather, insurance losses and other types of risks. JPMorgan Chase and Deutsche Bank are some of the financial institutions that will be holding parimutuel auctions in early 2002.

Abstract:
Parimutuel principles are widely used as an alternative to fixed odds gambling in which a bookmaker acts as a dealer by quoting fixed rates of return on specified wagers. A parimutuel game is conducted as a call auction in which odds are allowed to fluctuate during the betting period until the betting period is closed or the auction "called." The prices or odds of wagers are set based upon the relative amounts wagered on each risky outcome. In microstructure terms, wagering under parimutuel principles is characterized by (1) call auction, non-continuous trading; (2) riskless funding of claim payouts using the amounts paid for all of the claims during the auction; (3) special equilibrium pricing conditions requiring the relative prices of contingent claims equal the relative aggregate amounts wagered on such claims; (4) endogenous determination of unique state prices; and (5) higher efficiency.

Recently, a number of large investment banks have adopted a parimutuel mechanism for offering contingent claims on various economic indices, such as the U.S. Nonfarm payroll report and Eurozone Harmonized inflation. The parimutuel mechanism employed is a call auction lasting about one hour for claims on the underlying index which include a variety of standard and exotic derivatives, including vanilla call and put options, forwards, digital options, range binary options, and linked buy/sell options such as risk reversals. A unique feature of the microstructure is that all of the claims offered are priced in equilibrium based upon a certain type of implementation of parimutuel mechanism principles. Our aim is to formalize these principles and point out some of the inherent advantages of the mechanism as applied to the recent auctions.

Our paper shows how the market microstructure incorporating parimutuel principles for contingent claims which allows for notional transactions, limit orders, and bundling of claims across states is constructed. We prove the existence of a unique price equilibrium for such a market and suggest an algorithm for computing the equilibrium.

We also suggest that for a broad class of contingent claims, that the parimutuel microstructure recently deployed offers many advantages over the dominant dealer and exchange continuous time mechanisms. First, the parimutuel mechanism does not require a discrete order match between two counterparties. Instead, orders are executed multilaterally. All executed order premium is used to fund all of the contingent in-the-money options, i.e., the payouts. Second, we believe the transparent and straightforward pricing mechanism will be attractive to market participants. We believe that the success of the parimutuel mechanism in the wagering markets can, with the modifications which have been made to the mechanism, be carried over into the capital markets. Third, we believe that the risk neutral and self-hedging nature of the parimutuel mechanism, from the perspective of the broker/dealer or other entity which hosts the auction, offers a superior tradeoff between the risk of derivatives dealing and the compensation for providing liquidity for contingent claims. Fourth, we have shown that the parimutuel mechanism as implemented in this paper is more efficient than other trading mechanisms. Finally, we believe that the parimutuel microstructure is ideally suited for completing some markets where there currently is an absence of liquidity, such as contingent claims on mortgage prepayment speeds, corporate earnings, weather, and economic statistics, such as the recent Eurozone inflation auction.

Pari-mutuel market microstructure, Financial options, Risk, Contingent claims

Abstract:
This chapter examines the current conditions in the US telecommunications sector (October 2002). We examine the impact of technological and regulatory change on market structure and business strategy. Among others, we discuss the emergence and decline of the telecom bubble, the impact on pricing of digitization and the emergence of Internet telephony. We briefly examine the impact of the 1996 Telecommunications Act on market structure and strategy in conjunction with the history of regulation and antitrust intervention in the telecommunications sector. After discussing the impact of wireless technologies, we conclude by venturing into some short term predictions. We express concern about the derailment of the implementation of the 1996 Act by the aggressive legal tactics of the entrenched monopolists (the local exchange carriers), and we point to the real danger that the intent of Congress in passing the 1996 Act to promote competition in telecommunications will not be realized. We also discuss the wave of mergers in the Telecommunications and cable industries.

telecommunications, regulation, interconnection, access, unbundling

Abstract:
This chapter examines the current conditions in the US telecommunications sector (October 2002). We examine the impact of technological and regulatory change on market structure and business strategy. Among others, we discuss the emergence and decline of the telecom bubble, the impact on pricing of digitization and the emergence of Internet telephony. We briefly examine the impact of the 1996 Telecommunications Act on market structure and strategy in conjunction with the history of regulation and antitrust intervention in the telecommunications sector. After discussing the impact of wireless technologies, we conclude by venturing into some short term predictions. We express concern about the derailment of the implementation of the 1996 Act by the aggressive legal tactics of the entrenched monopolists (the local exchange carriers), and we point to the real danger that the intent of Congress in passing the 1996 Act to promote competition in telecommunications will not be realized. We also discuss the wave of mergers in the Telecommunications and cable industries.

telecommunications, regulation, interconnection, access, unbundling

Abstract:
This paper is the entry under "trademarks" in the New Palgrave Dictionary of Economics and the Law. It discusses the economic function of trademarks in conveying information to consumers, as well as the various distortions that may arise in the function of trademarks.

Abstract:
This paper evaluates the incentive of firms to vertically integrate in a simple 2X2 Bertrand model of two substitutes that are each comprised of two complementary components. It confirms that all prices fall as a result of a vertical merger. Further, we find that, when the composite goods are poor substitutes, producers of complementary components are better off after integration. Thus, at equilibrium, each pair of complementary goods is produced by a single firm (parallel vertical integration). In contrast, when the composite goods are close substitutes, vertical integration reduces profits of the merging firms and is therefore undesirable. Thus, at equilibrium, all four products are produced by independent firms (independent ownership). The reason for the change in the direction of the incentive to merge is that, as the composite goods become closer substitutes, competition between them reduces prices (in comparison to full monopoly) thereby eliminating the usefulness of a vertical merger in accomplishing the same price effect. We also find that, for intermediate levels of substitution, firms producing complementary components prefer to merge only if the substitute good is produced by an integrated firm. Thus, for intermediate levels of substitution, both parallel vertical integration and independent ownership are equilibria. When the demand system is symmetric, total surplus is higher in parallel vertical integration, for all degrees of substitution among the products, even for the case when the goods are close substitutes and parallel vertical integration is not the equilibrium outcome. Thus, the market provides less vertical integration than is optimal from a social surplus maximizing point of view.

Mergers, vertical integration

Abstract:
This paper evaluates the incentive of firms to vertically integrate in a simple 2X2 Bertrand model of two substitutes that are each comprised of two complementary components. It confirms that all prices fall as a result of a vertical merger. Further, we find that, when the composite goods are poor substitutes, producers of complementary components are better off after integration. Thus, at equilibrium, each pair of complementary goods is produced by a single firm (parallel vertical integration). In contrast, when the composite goods are close substitutes, vertical integration reduces profits of the merging firms and is therefore undesirable. Thus, at equilibrium, all four products are produced by independent firms (independent ownership). The reason for the change in the direction of the incentive to merge is that, as the composite goods become closer substitutes, competition between them reduces prices (in comparison to full monopoly) thereby eliminating the usefulness of a vertical merger in accomplishing the same price effect. We also find that, for intermediate levels of substitution, firms producing complementary components prefer to merge only if the substitute good is produced by an integrated firm. Thus, for intermediate levels of substitution, both parallel vertical integration and independent ownership are equilibria. When the demand system is symmetric, total surplus is higher in parallel vertical integration, for all degrees of substitution among the products, even for the case when the goods are close substitutes and parallel vertical integration is not the equilibrium outcome. Thus, the market provides less vertical integration than is optimal from a social surplus maximizing point of view.

Mergers, vertical integration

Abstract:
We examine the intersection of patents and antitrust where a patent holder uses the monopoly power it possesses in the market for a patented product to exclude competitors in an adjacent market and attempt to monopolize or monopolize the adjacent market. The present scheme for awarding patents cannot judge when the issuance of a patent will lead to the appropriate balance between innovation and economic efficiency. Where a patent holder's invention uses an interface with adjacent products, the patent holder may be tempted to extend its patent monopoly into adjacent markets that depend upon the interface with the patented invention. Economic theory suggests that it is inappropriate to immunize a patent holder from antitrust liability when it attempts to extend its patent monopoly into adjacent markets because it could decrease consumer surplus. Courts have expressed their reluctance to scrutinize a patent holder's innovations and design changes because of the potential benefits of the innovations and their reluctance to second-guess the marketplace. However, applying traditional antitrust principles, courts have found that monopolists could be liable for unlawfully extending their monopoly positions into adjacent markets in the areas of computer peripherals and software applications; aftermarkets for replacement parts, service and maintenance of durable goods; design changes to medical devices; and changes in drug formulas. While the patent laws provide a spur to innovation by granting limited monopoly rights, the antitrust laws curb the excessive reach of these monopoly rights by acting as a check on excessive expansion of the scope of the patent grant. Courts are the only participants in the legal process that have the competence to ensure that patents do not cause economic stagnation and harm by permitting a patent holder to extend its monopoly into an adjacent market. Consequently, courts should be willing to apply antitrust principles to cases involving the monopolization of interfaces through design changes.

Abstract:
We examine the intersection of patents and antitrust where a patent holder uses the monopoly power it possesses in the market for a patented product to exclude competitors in an adjacent market and attempt to monopolize or monopolize the adjacent market. The present scheme for awarding patents cannot judge when the issuance of a patent will lead to the appropriate balance between innovation and economic efficiency. Where a patent holder's invention uses an interface with adjacent products, the patent holder may be tempted to extend its patent monopoly into adjacent markets that depend upon the interface with the patented invention. Economic theory suggests that it is inappropriate to immunize a patent holder from antitrust liability when it attempts to extend its patent monopoly into adjacent markets because it could decrease consumer surplus. Courts have expressed their reluctance to scrutinize a patent holder's innovations and design changes because of the potential benefits of the innovations and their reluctance to second-guess the marketplace. However, applying traditional antitrust principles, courts have found that monopolists could be liable for unlawfully extending their monopoly positions into adjacent markets in the areas of computer peripherals and software applications; aftermarkets for replacement parts, service and maintenance of durable goods; design changes to medical devices; and changes in drug formulas. While the patent laws provide a spur to innovation by granting limited monopoly rights, the antitrust laws curb the excessive reach of these monopoly rights by acting as a check on excessive expansion of the scope of the patent grant. Courts are the only participants in the legal process that have the competence to ensure that patents do not cause economic stagnation and harm by permitting a patent holder to extend its monopoly into an adjacent market. Consequently, courts should be willing to apply antitrust principles to cases involving the monopolization of interfaces through design changes.

patents, antitrust, adjacent markets, complementarity, innovation, efficiency, aftermarkets

Abstract:
This paper critiques some of the properties of the so-called "efficient component pricing rule" (ECPR) for access to a bottleneck (monopoly) facility. When a rival and the bottleneck monopolist both produce a complementary component to the bottleneck service, the ECPR specifies that the access fee paid by the rival to the monopolist should be equal to the monopolist's opportunity costs of providing access, including any forgone revenues from a concomitant reduction in the monopolist's sales of the complementary component. We focus especially on the case in which the monopolist's price for the complementary component is above all relevant marginal costs. In this case the ECPR's exclusion of rivals may be socially harmful, since it may be preventing a substantial decrease in the price of the complementary component.

Abstract:
We analyze a model of multi-period monopoly in durable goods. Taking into consideration the special conditions of software markets, we assume that there are no used software markets and that manufacturers stop selling older software when they introduce a replacement model. We show that nominal as well as discounted (real) prices decrease over time but are above cost, thereby violating the Coase conjecture. In contrast, when "new" durable goods are introduced by the monopolist which are only partially compatible with "old" durable goods, prices may increase over time. This occurs when the intensity of network externalities arising from weak partial forward compatibility (influencing the demand of the old good from sales of the new one) is low compared to the intensity of network externalities arising from partial backward compatibility (influencing the demand of the new good from sales of the old one). A new product introduced by an entrant is successful only when it has strong externalities arising from forward compatibility. In this case, the entrant and the incumbent have opposite incentives regarding the degree of forward compatibility of the new product (that defines the extent of network externalities of the old product on consumers of the new one).


Key words: durable goods, monopoly, network externalities

Abstract:
This paper analyzes the economics of industries where network externalities are significant. In such industries, firms have strong incentives to adhere to common technical compatibility standards so that they reap the network externalities of the whole group. However, a firm also benefits from producing an incompatible product thereby increasing its horizontal product differentiation. We show how competition balances these opposing incentives. We find that market equilibria often exhibit extreme disparities in sales, output prices, and profits across firms, despite no inherent differences in the firms' production technologies. This may explain the frequent domination of network industries by one or two firms. We also find that the presence of network externalities dramatically affects conventional welfare analysis, as total surplus in markets where these externalities are strong is highest under monopoly and declines with entry of additional firms.

Abstract:
Trinko, a local telecommunications services customer of AT&T, sued Verizon for anti-competitively raising the costs of AT&T, its rival in the market for local telecommunications services who, pursuant to the rules of the Telecommunications Act of 1996 was leasing parts of the local telecommunications network (unbundled network elements, "UNEs") from Verizon at "cost plus reasonable profit" prices. The Supreme Court held that Trinko's complaint failed to state a claim under Section 2 of the Sherman Act, and dismissed the complaint. I argue that the Court drew incorrect inferences from its Aspen Skiing decision. The Court also missed a key vertical leveraging issue in Trinko. Verizon leveraged its monopoly of local telecommunications network infrastructure by raising the costs of rivals in retailing services who leased unbundled network elements from it as well as decreasing the quality of their services so that such rivals were disadvantaged. Verizon used such actions that raised the costs and/or decreased the quality of rivals in retailing services aiming to preserve its traditional monopoly in the local telecommunications services market which was challenged by the opening of competition mandated by the Telecommunications Act of 1996. In doing so, Verizon caused a lower number of leases of unbundled network elements from itself to retailing rivals, and thus incurred a revenue sacrifice. Therefore the actions of Verizon in raising the costs of retailing telecommunications services rivals are an indication of liability according to the "sacrifice principle" proposed in the Government's brief in Trinko, according to which a defendant is liable if its conduct "involves a sacrifice of short-term profits or goodwill that makes sense only insofar as it helps the defendant maintain or obtain monopoly power," even though the sacrifice principle defines a stringent condition for a finding of liability.

Vertical leverage, sacrifice principle, Supreme Court, monopolization, Trinko, telecommunications, Sherman Act section 2, vertical price squeeze, raising rivals' costs, Telecommunications Act of 1996

Abstract:
This paper evaluates the effectiveness of several pricing rules intended to promote entry into a network industry dominated by an incumbent carrier. Drawing on the work of Cournot and Hotelling, we develop a model of competition between two interconnected networks. In a symmetric equilibrium, the price of cross-network calls exceeds the price of internal calls. This "calling circle discount" tends to "tip" the industry to a monopoly equilibrium as would a network externality. By equalizing charges for terminating calls, reciprocity eliminates differences between internal and cross-network prices and makes monopoly less likely. Imputation counteracts an incentive by the dominant network to "price squeeze" a rival by eliminating differences in the wholesale price of termination and the implicit price for internal use. By increasing profits of rival networks and increasing their subscribers' surplus, imputation supports additional entry. Finally, an unbundling rule reduces termination fees charged by a dominant network that was engaging in pure bundling. Again, entry will be facilitated as rival networks offer potential subscribers a more attractive rate schedule.

Abstract:
We discuss the effects of strategic commitments and of network size in the process of setting interconnection fees across competing networks. We also discuss the importance of the principles of reciprocity and imputation of interconnection charges on market equilibria. Reciprocity means that both networks charge the same for interconnection. Imputation means that a network charges its customers as much as it charges customers of the other network for the same service. Assuming that each consumer cannot subscribe to more than one network, we begin by analyzing a game of strategic symmetry where the two networks choose all prices simultaneously. Second, we allow a dominant network to set the interconnection fee before the opponent network can set its prices. This results in a price-squeeze on the rival network. Third, we show that the imposition of a reciprocity rule eliminates the strategic power of the first mover. Under reciprocity, one network sets the common interconnection fee at cost, and the equilibrium prices for final services are lower than in the two previous games without reciprocity. Moreover, prices under reciprocity obey the principle of imputation. In the long run, consumers subscribe to one of the two networks. Typically, there is a multiplicity of equilibria, including corner equilibria, where all consumers subscribe to the same network. However, under reciprocity, there are no corner equilibria.

Two-way networks, interconnection, reciprocity, parity, two-sided bottlenecks

Abstract:
Under the rules of the Telecommunications Act of 1996, incumbent local exchange carriers, including Verizon, were obligated to lease parts of their local telecommunications network to any firm at cost plus a reasonable profit prices which could combine them at will, add retailing services and sell local telecommunication service as a rival to the incumbent. AT&T, an entrant in local telecommunications, leased parts of Verizon's network. Trinko, a local telecommunications services customer of AT&T, sued Verizon alleging various anti-competitive actions of Verizon against AT&T, including that Verizon raised the costs of AT&T, its downstream retail rival. The Supreme Court held that Trinko's complaint failed to state a claim under Section 2 of the Sherman Act, and dismissed the complaint. I argue that Verizon had two monopolies in local telecommunications: a monopoly of the local telecommunications network, as well as a monopoly in retail services. The 1996 Act allowed for competition in retail services and also imposed cost-based pricing on leases of Verizon's network. Verizon, unable to increase the lease price on its network, reverted to raising-rivals-costs strategies against its retail competitors. Thus, Verizon used its monopoly of the network infrastructure to disadvantage entrants in retail. In doing so, Verizon lost short term profits that it would have earned from leasing its network to entrants, since the 1996 Act had set the lease price at cost plus "reasonable profit." Thus, Verizon is liable if the "sacrifice principle" is applied. According to the sacrifice principle, a defendant is liable if its conduct "involves a sacrifice of short-term profits or goodwill that makes sense only insofar as it helps the defendant maintain or obtain monopoly power."

Vertical Leverage, Refusal to Deal, Monopoly, Sacrifice Principle, Trinko

Abstract:
We present a model where producers of complementary goods have the option to practice mixed bundling. In the first stage of a two-stage game, firms choose between a mixed bundling and a non- bundling strategy. In the second stage, firms choose prices. We show that mixed bundling is a dominant strategy for both firms. However, when the composite goods are not very close substitutes, at the bundling-bundling equilibrium both firms are worse off than when they both commit not to practice mixed bundling.

Abstract:
This paper considers the incentive for non-price discrimination of a monopolist in an inputmarket who also sells in an oligopoly downstream market through a subsidiary. Such amonopolist can raise the costs of the rivals to its subsidiary though discriminatory qualitydegradation. I find that the monopolist always, even when it is cost-disadvantaged, has theincentive to raise the costs of the rivals to its subsidiary in a discriminatory fashion, but doesnot have the incentive to raise costs to the whole downstream industry including itssubsidiary. Moreover, increasing rivals’ costs nullifies the effects of traditional imputationfloors, and prompts the creation of imputation floors that account for the artificial costsimposed on downstream rivals. The results of this paper raise concerns about the potentiallyanti-competitive effects of entry of local exchange carriers in long distance service. Theresults may also suggest the imposition of certain unbundling and technical specificationdisclosure requirements to monopolists in high technology industries.

monopoly, discrimination, vertical integration

Abstract:
This paper considers the incentive for non-price discrimination of a monopolist in an input market who also sells in an oligopoly downstream market through a subsidiary. Such a monopolist can raise the costs of the rivals to its subsidiary though discriminatory quality degradation. I find that the monopolist always, even when it is cost-disadvantaged, has the incentive to raise the costs of the rivals to its subsidiary in a discriminatory fashion, but does not have the incentive to raise costs to the whole downstream industry including its subsidiary. Moreover, increasing rivalsi costs nullifies the effects of traditional imputation floors, and prompts the creation of imputation floors that account for the artificial costs imposed on downstream rivals. The results of this paper raise concerns about the potentially anti-competitive effects of entry of local exchange carriers in long distance service. The results may also suggest the imposition of certain unbundling and technical specification disclosure requirements to monopolists in high technology industries.

Abstract:
This paper considers the incentive for non-price discrimination of a monopolist in an input market who also sells in an oligopoly downstream market through a subsidiary. Such a monopolist can raise the costs of the rivals to its subsidiary though discriminatory quality degradation. I find that the monopolist always, even when it is cost-disadvantaged, has the incentive to raise the costs of the rivals to its subsidiary in a discriminatory fashion, but does not have the incentive to raise costs to the whole downstream industry including its subsidiary. Moreover, increasing rivals' costs nullifies the effects of traditional imputation floors, and prompts the creation of imputation floors that account for the artificial costs imposed on downstream rivals. The results of this paper raise concerns about the potentially anti-competitive effects of entry of local exchange carriers in long distance service. The results may also suggest the imposition of certain unbundling and technical specification disclosure requirements to monopolists in high technology industries.

Abstract:
Local telecommunications competition was an important goal of the 1996 Telecommunications Act. We evaluate the consumer welfare effects of entry into residential local telephone service in New York State using household-level data from September 1999 to March 2003. We address the prevalence of nonlinear tariffs by developing a discrete/continuous demand model that allows for service bundling and unobservable provider quality. We find that the average subscriber to the entrants' services gains a monthly equivalent of $2.33, or 6.2% of her bill, in welfare from competition. These gains accrue primarily from firm differentiation and new plan introductions rather than from price effects.

Entry, Nonlinear Pricing, Telecommunications, Discrete/Continuous Demand

Abstract:
We discuss the current structure of card networks that facilitate transactions between merchants and consumers. We find that presently fees for this intermediation are considerably higher than costs. This is facilitated by rules imposed by the card networks on the merchants that do not allow merchants to steer competition to cards that have lower fees. It has also been facilitated by the requirement that a merchant has to accept all cards of the same network (honor all cards rule) - recently abolished in the US, as well as by the fact that the networks set the maximum interface fee between issuing and acquiring banks. We propose the abolition of anti-steering rules so that merchants are able to pass on card holders the costs of the card they use. This will facilitate inter- and intra-network competition and will improve the competitiveness and efficiency of the market.

card networks, payment systems, anti-steering, surcharge, discrimination, oligopoly, collusion, MasterCard, Visa, American Express, credit card, debit card

Abstract:
We discuss the formation of technical standards platforms in industries with network externalities where firms are free to choose their degree of technical compatibility with competitors. In our model, firms choose affiliation to a technical standards coalition in the first stage of a game, and play an oligopoly game in the second stage. In adding itself to a technical standards coalition, a firm benefits from the network effects of the whole coalition, but also faces increased competition in the output market from other firms in the coalition. Also, the increase of the size of the coalition changes the competitive position of members of that coalition relative to other firms. We find that the extent and size of coalitions at equilibrium depends crucially on the degree of the intensity of network effects. When network effects are very strong, full compatibility prevails. When externalities are slightly weaker, two standards coalitions are formed, a singleton, and one with all remaining firms. On the other extreme, for very weak network effects, the equilibrium is total incompatibility, and for slightly more intense network effects, coalitions are of small size. We characterize a number of other equilibria for intermediate strengths of network externalities.

Abstract:
The paper analyzes and compares the investment incentives of platform and application developers for Linux and Windows. We find that the level of investment in applications is larger when the operating system is open source rather than proprietary. The comparison of the levels of investment in the operating systems depends, among others, on reputation effects and the number of developers. The paper also develops a short case study comparing Windows and Linux and identifies new directions for open source software research.

open source software, operating systems, technology platforms, Linux, innovation incentives

Abstract:
I discuss and assess the various standards for establishing liability for loyalty discounts offered under a requirement contract. I find that the standard proposed by the Antitrust Modernization Commission is likely to result in many cases of violation that are not caught. The safe harbor defined by the AMC would permit activity that is in fact anticompetitive. I propose instead a structured rule of reason test that relies on consumers' surplus comparisons under the loyalty/requirement practice and the but-for world. The proposed standard does not have a safe harbor based on a price/cost comparison because such comparisons do not generally correspond to consumers' surplus comparisons.

bundling, loyalty discounts, requirement contracts, monopolization, antitrust, monopoly

Abstract:
We discuss and evaluate the incentives for vertical expansion and vertical mergers in the payments systems industry paying particular attention to the implications of the existence of network effects in this industry. We assess the incentives of large merchants to extend vertically into payments systems, noting that this incentive is maximized when there is significant market power in payments systems and merchants are not sufficiently compensated for the business they bring to the network.

payments system, credit cards, debit cards, non-banks, vertical integration, market power, monopoly

Abstract:
We discuss and evaluate the incentives for vertical expansion and vertical mergers in the payments systems industry paying particular attention to the implications of the existence of network effects in this industry. We assess the incentives of large merchants to extend vertically into payments systems, noting that this incentive is maximized when there is significant market power in payments systems and merchants are not sufficiently compensated for the business they bring to the network.

payments system, credit cards, debit cards, non-banks, vertical integration, market power, monopoly

Abstract:
We show that application of the so-called "Market Determined Efficient Component Pricing Rule," the "Efficient Component Pricing Rule," and, in general, of pricing rules that are based on private opportunity costs would perpetuate pricing inefficiencies and result in lower social surplus than pricing which is based on social opportunity cost rather than private opportunity costs.

Abstract:
The Microsoft cases in the United States and in Europe have been influential in determining the contours of the substantive liability standards for dominant firms in US antitrust law and in EC Competition law. The competition law remedies that were adopted, following the finding of liability, seem, however, to constitute the main measure for the “success” of the case(s). An important disagreement exists between those arguing that the remedies put in place failed to address the roots of the competition law violation identified in the liability decision and others who advance the view that the remedies were far-reaching and that their alleged failure demonstrates the weakness of the liability claim. This study evaluates these claims by examining the variety of remedies that were finally imposed in the European Microsoft cases, from a comparative perspective. The study begins with a discussion of the roots of the Microsoft issues in Europe and the consequent choice of a remedial approach by the Commission and the Court. It then explores the effectiveness of the remedies in achieving the aims that were set. The non-consideration of the structural remedy in the European case and the pros and cons of developing such a remedy in the future are briefly discussed before more emphasis is put on alternative remedies (competition and non-competition law ones) that have been suggested in the literature. The study concludes by discussing the fit between the remedy and the theory of consumer harm that led to the finding of liability and questions a total dissociation between the two. We believe that it is important to think seriously about potential remedies before litigation begins. However, we do not require an ex ante identification of an appropriate remedy by the plaintiffs, since this could lead to underenforcement or overenforcement.

antitrust, remedies, Microsoft, complementarity, innovation, efficiency, monopoly, oligopoly, media player, interoperability, Internet browser

Abstract:
We extend the results of our article, "Access and Interconnection Pricing? How Efficient Is the 'Efficient Component Pricing Rule'?," Antitrust Bulletin (1995). In the presence of a monopolized essential input, we show that application of the Efficient Component Pricing Rule ("ECPR") in pricing this input to downstream competitors perpetuates monopoly distortions and high prices of final goods services. We show these results for various demand conditions, including conditions that are accepted to hold in the telecommunications sector. We also respond to various criticisms raised by A. Larson in "The Efficiency of the Efficient-Component-Pricing Rule: A Comment," Antitrust Bulletin, (this issue) (1998).

Abstract:
We analyze the equilibrium size of networks under alternative market structures. Networks are characterized by positive size externalities (commonly called "network externalities"). That is, the benefits of the addition of an extra node (or an extra customer) exceed the private benefitsaccruing to the particular node (or customer). A direct consequence of this demand structure is that perfect competition does not implement the optimal outcome. Because of the externality, there exists a range of prices within which three different network sizes can be supported as equilibria: a zero size network, an intermediate size that is unstable, and a large stable and Pareto optimal one. We expect that the market will select the largest of the three equilibrium networks. As a result, small networks will not observed. We call critical mass the size of the smallest network that can be supported in equilibrium. Alternative allocation systems internalize the network externality to different degrees, and therefore result in a variety of sizes of critical masses and price-network size paths. A welfare-maximizing planner supports a larger network than results in perfect competition. Surprisingly, a monopolist, even if allowed to influence consumers expectations, always chooses a network of smaller size than in perfect competition.Oligopolists of compatible network goods support networks of smaller size than perfectcompetition and larger than monopoly. We extend our results to durable goods in a dynamic setting. In the presence of a downward time trend for industry marginal cost, the presence of network externalities increases the speed at which market demand grows. We use this prediction to calibrate the model and obtain estimates of the parameter measuring a consumer s valuationof the installed base (i.e., the network effect) using aggregate time series data on prices and quantities in the US fax market.

networks, critical mass, fax, externalities

Abstract:
We analyze the equilibrium size of networks under alternative market structures. Networks are characterized by positive size externalities (commonly called "network externalities"). That is, the benefits of the addition of an extra node (or an extra customer) exceed the private benefits accruing to the particular node (or customer). A direct consequence of this demand structure is that perfect competition does not implement the optimal outcome. Because of the externality, there exists a range of prices within which three different network sizes can be supported as equilibria: a zero size network, an intermediate size that is unstable, and a large stable and Pareto optimal one. We expect that the market will select the largest of the three equilibrium networks. As a result, small networks will not be observed. We call critical mass the size of the smallest network that can be supported in equilibrium. Alternative allocation systems internalize the network externality to different degrees, and therefore result in a variety of sizes of critical masses and price-network size paths. A welfare-maximizing planner supports a larger network than results in perfect competition. Surprisingly, a monopolist, even if allowed to influence consumers' expectations, always chooses a network of smaller size than in perfect competition. Oligopolists of compatible network goods support networks of smaller size than perfect competition and larger than monopoly. We extend our results to durable goods in a dynamic setting. In the presence of a downward time trend for industry marginal cost, the presence of network externalities increases the speed at which market demand grows. We use this prediction to calibrate the model and obtain estimates of the parameter measuring a consumer's valuation of the installed base (i.e., the network effect) using aggregate time series data on prices and quantities in the US fax market.

Abstract:
We discuss salient economic aspects of the Internet, including the possible abolition of net neutrality by local broadband access networks as well as potential incompatibilities and degradation of connectivity in the Internet backbone.

Abstract:
This paper summarizes the responses to a questionnaire sent to equity traders through TraderForum of the Institutional Investor. The respondents manage in total a very significant percentage of equity assets under management in the United States. The focus of the questions was the extent of the demand for immediate execution of orders. We found that the majority of traders are willing to trade patiently if this reduces execution costs. Many traders indicate that they frequently delay trades to obtain better prices. Most respondents indicate that they are typically given more than a day to implement a large order, that they typically break up more than 20% of their large orders for execution over time, and that they regularly take more than a day for a large order that has been broken into lots to be executed completely. There is a generally positive view of alternative electronic trading systems, such as Instinet and Investment Technology Group's POSIT. The key motives for trading on these systems are reduced market impact, lower spreads, better liquidity, and anonymity. The respondents indicate that the key changes that would make alternative electronic systems more attractive are an increase in execution rates and more convenient times of trading. The responses to the survey also show that alternative electronic systems would be used more if the traders did not have soft dollar arrangements.

Abstract:
Parimutuel principles are widely used as an alternative to fixed odds gambling in which a bookmaker acts as a dealer by quoting fixed rates of return on specified wagers. A parimutuel game is conducted as a call auction in which odds are allowed to fluctuate during the betting period until the betting period is closed or the auction 'called'. The prices or odds of wagers are set based upon the relative amounts wagered on each risky outcome. In financial microstructure terms, trading under parimutuel principles is characterised by (1) call auction, non-continuous trading; (2) riskless funding of claim payouts using the amounts paid for all of the claims during the auction; (3) special equilibrium pricing conditions requiring the relative prices of contingent claims equal the relative aggregate amounts wagered on such claims; (4) endogenous determination of unique state prices; and (5) higher efficiency. Recently, a number of large investment banks have adopted a parimutuel mechanism for offering contingent claims on various economic indices, such as the US Nonfarm payroll report and Eurozone Harmonised inflation.

Our paper shows how the market microstructure incorporating parimutuel principles for contingent claims which allows for notional transactions, limit orders, and bundling of claims across states is constructed. We prove the existence of a unique price equilibrium for such a market and suggest an algorithm for computing the equilibrium.

We also suggest that for a broad class of contingent claims, that the parimutuel microstructure recently deployed offers many advantages over the dominant dealer and exchange continuous time mechanisms.

Abstract:
The vast majority of US residential consumers face a monopoly or duopoly in broadband Internet access. Up to now, the Internet was characterized by a regime of net neutrality where there was no discrimination in the price of a transmitted information packet based on the identities of either the transmitter or the receiver or based on the application or type of content that it contained. The providers of DSL or cable modem access in the United States, taking advantage of a recent regulatory change that effectively abolished net neutrality and non-discrimination protections, and possessing significant market power, have recently discussed implementing a variety of discriminatory pricing schemes. This paper discusses and evaluates the implication of a number of these schemes on prices, profits of the network access providers and those of the complementary applications and content providers, as well as the impact on consumers. We also discuss an assortment of anti-competitive effects of such price discrimination, and evaluate the possibility of imposition of net neutrality by law.

net neutrality, Internet, price discrimination, vertical restrictions, two-sided

Abstract:
A model of franchising competition in locationally differentiated products is constructed. A franchisor (upstream firm) collects a marginal transfer fee per unit of output sold by a franchisee (downstream firm). For example, the marginal transfer fee can be realized as a markup on variable inputs supplied by the franchisor. A franchisor also collects a lump-sum rent(commonly called "franchising fee") from each franchisee. Acting in the first stage, a franchisor can manipulate the degree of competition in the downstream market through his choice of the marginal fee while keeping the franchisee s profits at zero through the lump sum rent. Franchisees choose prices for the final goods in the second stage. It is shown that, at the unique subgame-perfect equilibrium, the marginal fee is above marginal cost. Compared to a regime ofvertically integrated firms, prices are higher, there are more numerous outlets when contractual costs are small, and social surplus is lower in the franchising regime.

Franchising, Locational Differentiation, Vertical Disintegration

Abstract:
This paper suggests that the introduction of bank branching restrictions and federal deposit insurance in the United States likely was motivated by political considerations. Specifically, we argue that these restrictions were instituted for the benefit of the small, unit banks that were unable to compete effectively with large, multi- unit banks. We analyze this 'political hypothesis' in two steps. First, we use a model of monopolistic competition between small and large banks to examine gains to the former group from the introduction of branching restrictions and government-sponsored deposit insurance. We then find strong evidence for the political hypothesis by examining the voting record of Congress.

Abstract:
The structure of the telecommunications industry has changed substantially in the last decade,raising public concern that the quality of our information infrastructure may be adversely affected. This paper extends the standard vertical differentiation model of imperfect competition to address the case of the choice of quality in complex systems. In these systems each demanded good consists of two complementary components whose quality may be set by competing firms. The extended framework is used to examine how changes in the vertical and horizontal structure of the industry affect the choice of compatibility, the overall system quality, the equilibrium market prices, and the allocation of surplus. The results from this analysis are interpreted in light of changes in the structure of the telecommunicationsindustry.

Abstract:
This paper analyzes the effects on the implementation of the Telecommunications Act of 1996 (â¬SActâ¬?) on US telecommunications markets and is based on my forthcoming bookwith the same title. The Act is a milestone in the history of telecommunications in theUnited States. Coming 12 years after the breakup of AT&T, the Act attempts to move alltelecommunications markets toward competition. The Act envisions competition in all telecommunications markets, both in the markets for the various elements that comprise the telecommunications network, as well as for the final services the network creates. Building on the experience of the long distance market, which was transformed from a monopoly to an effectively competitive market over the last 12 years, the Act attempts to promote competition in the hitherto monopolized local exchange markets. The Act recognizes the telecommunications network as a network of interconnected networks. Telecommunications providers are required to interconnect with entrants at any feasible point the entrant wishes. Most importantly, the Act requires that incumbent local exchange carriers (â¬SILECsâ¬?) (i) lease parts of their network (unbundled network elements) to competitors â¬Sat costâ¬?; (ii) provide at a wholesale discount to competitors any service the ILEC provides; and (iii) charge reciprocal rates in termination of calls to their networkand to networks of local competitors. Moreover, the Act requires that ILECs that came out of the Bell System meet a number of requirements, including a public interest test, before they may enter into the long distance market. Thus, the Act provides somesafeguards against the export of ILEC monopoly power to other parts of the network.Numerous legal challenges to the Act and its implementation have been raised by theILECs resulting in very slow implementation of the Act, and, in many cases, in nosubstantial implementation of the provisions of the Act. Thus, more than two years afterthe passage of the Act, there is very little entry and competition in local exchange markets. In response to the apparent failure of the implementation Act, there has been a wave of mergers in the US telecommunications industry.

telecommunications, regulation, competition

Abstract:
We discuss the case of a monopolist of a base good in the presence of a complementary good provided either by it or by another firm. We assess and calibrate the extent of the influence on the profits from the base good that is created by the existence of the complementary good. We establish an equivalence between a model of a base and a complementary good and a reduced-form model of the base good in which network effects are assumed in the consumers utility functions as a surrogate for the presence of direct or indirect network effects, such as complementary goods produced by other firms. We also assess and calibrate the influence on profits of the intensity of network effects and quality improvements in both goods. We evaluate the incentive that a monopolist of the base good has to improve its quality rather than that of the complementary good under different market structures. Finally, based on our results, we discuss a possible explanation of the fact that Microsoft Office has a significantly higher price than Microsoft Windows although both products have comparable market shares.

calibration, monopoly, network effects, complementary goods, software, Microsoft

Abstract:
Trinko, a local telecommunications services customer of AT&T, sued Verizon for anti-competitively raising the costs ofAT&T, Verizon's rival in the market for local telecommunications services. Pursuant to the rules of the Telecommunications Act of1996, AT&T was leasing parts of the local telecommunications network (unbundled network elements, "UNEs") from Verizon at "costplus reasonable profit" prices. The Supreme Court held that Trinko's complaint failed to state a claim under § 2 of the ShermanAct, and dismissed the complaint. I argue that the Court drew incorrect inferences from its AsPen Skiing decision. The Court alsomissed a key vertical leveraging issue in Trinko. The opening of competition mandated by the Telecommunications Act of 1996challenged Verizon's traditional monopoly in the local telecommunications services market. By raising the cost and/or decreasingthe quality of the service of rivals in the retailing services market, Verizon aimed to preserve that monopoly. As a result of these efforts, rivals suffered a disadvantage. Yet Verizon also caused retailing rivals to lease a lower number of unbundled network elementsand thus incurred a revenue sacrifice. Therefore the actions of Verizon in raising the costs of retailing telecommunications services rivals are an indication of. liability according to the. "sacrificeprinciple" proposed in the Government's brief in Trinko, according to which a defendant is liable if its conduct "involves a sacrifice of short-term profits or goodwill that makes sense only insofar as it helps the defendant maintain or obtain monopoly power," even though the sacrifice principle defines a stringent condition for a finding of liability.

Abstract:
We show that, despite coordination in the quality level of the components that theyprovide, independent vertically-related (disintegrated) monopolists will provide products of lower quality level than a sole integrated monopolist. Further, the integrated monopolist achieves higher market coverage, higher consumer surplus, and higher profits.We establish these results for any distribution of preferences in the standard model of quality differentiation. Despite the lower quality, we also show that, for a wide class of cost functions, price will be higher in a market of independent vertically-related monopolists. All results are the effects of the interaction of double-marginalization, occurring in the market of independent monopolists, with the choice of quality. Ó 1999 Elsevier Science B.V. Allrights reserved.

Quality, Duopoly, Vertical integration

Abstract:
We show that, despite coordination in the quality level of the components that they provide, independent vertically-related (disintegrated) monopolists will provide products of lower quality level than a sole integrated monopolist. Further, the integrated monopolist achieves higher market coverage, higher consumer surplus, and higher profits. We establish these results for any distribution of preferences in the standard model of quality differentiation. Despite the lower quality, we also show that, for a wide class of cost functions, price will be higher in a market of independent vertically-related monopolists. All results are the effects of the interaction of double-marginalization occurring in the market of independent monopolists with the choice of quality.

Abstract:
Liquidity plays a crucial role in financial exchange markets. Markets typically create liquidity through spatial consolidation with specialist/market makers matching orders arriving at different times. However, continuous trading systems have an inherent weakness in the potential for insufficient liquidity. This risk was highlighted during the 1987 market crash. Subsequent proposals suggested time consolidation in the form of call markets integrated into the continuous trading environment. This paper explores the optimal fee schedule for a monopolist call market auctioneer competing with a continuous auction market. Liquidity is an externality in that traders are not fully compensated for the liquidity they bring to the market. Thus, in the absence of differential transaction costs, traders have an incentive to delay order entry resulting in significant uncertainty in the number of traders participating at the call. A well-designed call market mechanism has to mitigate this uncertainty. The trading mechanism examined utilizes two elements: commitments to trade and discounts in fees for early commitment; thus, optimal transaction fees are time-dependent. Traders who commit early are rewarded for the enhanced liquidity that their commitment provides to the market. As participants commit earlier they pay strictly lower fees and are strictly better off by participating in the call market rather than in the continuous market. A comparison to the social welfare maximizing fee schedule shows that the monopolist does not internalize the externality completely, with the social welfare maximizing schedule offering lower fees to all traders.

Abstract:
Liquidity plays a crucial role in financial exchange markets. Markets typically create liquidity through spatial consolidation with specialist/market makers matching orders arriving at different times. However, continuous trading systems have an inherent weakness in the potential for insufficient liquidity. This risk was highlighted during the 1987 market crash. Subsequent proposals suggested time consolidation in the form of call markets integrated into the continuous trading environment. This paper explores the optimal fee schedule for a monopolist call market auctioneer competing with a continuous auction market. Liquidity is an externality in that traders are not fully compensated for the liquidity they bring to the market. Thus, in the absence of differential transaction costs, traders have an incentive to delay order entry resulting in significant uncertainty in the number of traders participating at the call. A well-designed call market mechanism has to mitigate this uncertainty. The trading mechanism examined utilizes two elements: commitments to trade and discounts in fees for early commitment; thus, optimal transaction fees are time- dependent. Traders who commit early are rewarded for the enhanced liquidity that their commitment provides to the market. As participants commit earlier they pay strictly lower fees and are strictly better off by participating in the call market rather than in the continuous market. A comparison to the social welfare maximizing fee schedule shows that the monopolist does not internalize the externality completely, with the social welfare maximizing schedule offering lower fees to all traders.

Financial exchange, call market, liquidity

Abstract:
a bookmaker acts as a dealer by quoting fixed rates of return on specified wagers. A parimutuel game is conducted as a call auction in which odds are allowed to fluctuate during the betting period until the betting period is closed or the auction "called." The prices or odds of wagers are set based upon the relative amounts wagered on each risky outcome. In financial microstructure terms, trading under parimutuel principles is characterized by (1) call auction, non-continuous trading; (2) riskless funding of claim payouts using the amounts paid for all of the claims during the auction; (3) special equilibrium pricing conditions requiring the relative prices of contingent claims equal the relative aggregate amounts wagered on such claims; (4) endogenous determination of unique state prices; and (5) higher efficiency. Recently, a number of large investment banks have adopted a parimutuel mechanism for offering contingent claims on various economic indices, such as the U.S. Nonfarm payroll report and Eurozone Harmonized inflation. Our paper shows how the market microstructure incorporating parimutuel principles for contingent claims which allows for notional transactions, limit orders, and bundling of claims across states is constructed. We prove the existence of a unique price equilibrium for such a market and suggest an algorithm for computing the equilibrium. We also suggest that for a broad class of contingent claims, that the parimutuel microstructure recently deployed offers many advantages over the dominant dealer and exchange continuous time mechanisms.

Abstract:
We analyze the sequential choices of locations in the Hotelling [0, 1] space ofvariety-differentiated products. n firms locate in sequence, one at a time. In stage n+1, all firms choose prices simultaneously. Firms anticipate correctly the decisions of subsequent entrants, as well as the equilibrium prices, so we analyze subgame-perfect equilibria. Weanalyze two games. In the first, the number of firms is fixed. In the second, the number of firms is determined by free entry, i.e., entry continues until the last entrant makes nonnegative profits. When the number of firms is fixed, the ordering of profits follows theorder of action. When the number of firms is determined by free entry, for a range of fixed costs, early entrants choose their positions strategically so as to keep out potential entrants. For a range of fixed costs, early actors reduce the distances among them to foreclose entry even though these actions reduce their profits given the number of active firms. For low enough fixed costs, entry cannot be prevented any more and a new firm enters resulting in a complete disruption of the locational pattern. In the game with a fixed number of firms, wefind that the order of the profits of the firms is the same as the order of action, so that it pays to be first. In contrast, in the free entry game it does not always pay to be first. We also note that entry of a new firm significantly reduces the pre-entry profits of incumbents. Thus, if a technology is available that would increase the costs of both incumbents and entrants ( raising both rivals and own costs ), it will be used to deter entry.

Abstract:
This short essay examines the current conditions in the US telecommunications sector (April 1999). We examine the impact of technological and regulatory change on marketstructure and business strategy. Among others, we examine the impact on pricing ofdigitization and the emergence of internet telephony. We briefly examine the impact of the 1996 Telecommunications Act on market structure and strategy in conjunction with the history of regulation and antitrust intervention in the telecommunications sector. After discussing the impact of wireless technologies, we conclude by venturing into some short term predictions. We express concern about the derailment of the implementation of the 1996 Act by the aggressive legal tactics of the entrenched monopolists (the local exchange carriers), and we point to the real danger that the intent of Congress in passing the 1996Act to promote competition in telecommunications will not be realized. We also discuss the wave of mergers in the Telecommunications and cable industries.

Abstract:
Non-uniform pricing equilibria are shown to dominate uniform pricing equilibria in free entry, monopolistically competitive markets with identical consumers. The non- uniform pricing equilibrium is welfare optimal. Comparisons of Cournot and non-uniform pricing equilibria in terms of the equilibrium number of firms and sales per firm show that the positioning of Cournot equilibria relative to the welfare optimal configuration of firms and outputs depends on the relative curvatures of inverse demand and average cost functions, entry-induced rotation of inverse demand functions, and the relative price effects of changes in own and other firms' outputs. The choice between the non- uniform and uniform pricing interpretations of equilibria in differentiated product markets may have important implications for policy analysis.

Monopolistic competition, efficiency

Abstract:
This paper develops some important concepts with respect to networks and compatibility. We note that the familiar concept of complementarity lies at the heart of the concept of compatibility. We further note the distinction between two-way networks (e.g., telephones, railroads, the Internet) and one-way networks (e.g., ATMs, television, distribution and service networks). In the former, additional customers usually yield direct externalities to other customers; in the latter the externalities are indirect, through increases in the number of varieties (and lower prices) of components. Most industries involve vertically related components and thus are conceptually similar to one-way networks. Accordingly, our analysis of networks has broad applicability to many industrial frameworks. We proceed by exploring the implications of networks and compatibility for antitrust and regulatory policy in three areas: mergers, joint ventures, and vertical restraints.

Abstract:
Despite its power as a transactions network, scant attention has been given to incorporating an electronic call into a major market center such as the NYSE or Nasdaq. An electronic call clears the markets for all assets at predetermined points in time. By bunching many transactions together, a call market increases liquidity, thereby decreasing transaction costs for public participants. After describing alternative call market structures and their attributes, we propose that an open book electronic call be held three times during the trading day: at the open, at 12:00 noon, and at the close. We discuss the impact of this innovation on an array of issues, including order flow and handling, information revelation, and market transparency. We also discuss the proposed changes from the perspectives of investors, listed companies, exchanges, brokers, and regulators.

Abstract:
This note shows that a monopolist facing any linear demand system for n goods and no fixed costs will produce positive quantities of all goods as long as demand is positive for all goods when all are sold at marginal cost. This is in contrast with the traditional view that, in general, a multiproduct monopolist does not produce positive quantities of all goods even though there is positive demand for each of them when prices are equal to marginal cost.

Abstract:
We examine the incentives of firms to form coalitions based on adherence to common technical standards. Many network goods as well as non-network goods with close complements exhibit "network externalities" -- i.e., the value of such goods increases with the size of sales of compatible products. Thus, firms have incentives to be in coalitions of compatible goods that share the same technical "standards." This incentive contrasts with the traditional incentive to differentiate each product and be a dominant player in a particular market "niche." This paper analyzes the interaction of these opposite incentives in the creation of technical standards coalitions. Despite no inherent differences in the features of the products and no cost differences, we find that often at equilibrium the market is highly concentrated with coalitions of widely varying sizes charging very different prices.

Abstract:
This paper evaluates the effectiveness of several pricing rules intended to promote entry into a network industry dominated by an incumbent carrier. Drawing on the work of Cournot and Hotelling, we develop a model of competition between two interconnected networks. In a symmetric equilibrium, the price of cross-network calls exceeds the price of internal calls. This "calling circle discount" tends to "tip" the industry to a monopoly equilibrium as would a network externality. By equalizing charges for terminating calls, reciprocity eliminates differences between internal and cross-network prices and makes monopoly less likely. Imputation counteracts an incentive by the dominant network to "price squeeze" a rival by eliminating differences in the wholesale price of termination and the implicit price for internal use. By increasing profits of rival networks and increasing their subscribers' surplus, imputation supports additional entry. Finally, an unbundling rule reduces termination fees charged by a dominant network that was engaging in pure bundling. Again, entry will be facilitated as rival networks offer potential subscribers a more attractive rate schedule.