The Economics of Network Industries

Cover......Page 1
Half-title......Page 3
The Economics of Network Industries......Page 5
Copyright......Page 6
Dedication......Page 7
Contents......Page 9
The Level and Prerequisites......Page 13
Typesetting and Acknowledgments......Page 14
1.1 Overview of Network Industries......Page 17
1.2.1 Government intervention......Page 22
1.2.2 “Natural” monopolies versus access pricing......Page 23
1.3 References and the Scientific Literature......Page 25
1.5 Selected References......Page 26
2. The Hardware Industry......Page 29
2.1 Hardware Compatibility......Page 31
2.2 The Network Externalities Approach......Page 32
2.2.1 Monopoly selling a single brand to identical consumers......Page 33
2.2.2 Monopoly selling a single brand to heterogeneous consumers......Page 39
2.2.3 Duopoly selling differentiated brands to heterogeneous consumers......Page 43
2.2.4 Summary of the network externalities approach......Page 51
2.3 The Components Approach......Page 52
2.3.1 Incompatible systems......Page 54
2.3.2 Compatible systems......Page 56
2.3.3 Compatibility versus incompatibility......Page 57
2.3.4 Summary of the components approach......Page 58
2.4.1 Keyboard compatibility and network externalities......Page 59
2.4.3 Network externalities in the market for spreadsheet programs......Page 60
2.5 Exercises......Page 62
2.6 Selected References......Page 64
3. The Software Industry......Page 67
3.1 Principles of Software Production......Page 69
3.2 The Determination of Software Variety......Page 70
3.3 Software Variety Under Hardware Competition......Page 73
3.3.1 Incompatible systems......Page 75
3.3.2 Compatible systems......Page 77
3.4 Software Variety and Partial Compatibility......Page 78
3.4.1 Determination of brand-specific software variety......Page 79
3.4.2 The effects of changing the degree of compatibility on the variety of brand-specific software......Page 80
3.5 Software Piracy......Page 81
3.6 Software Pricing and Market Segmentation......Page 86
3.7 Empirical Findings......Page 89
3.7.2 Compact-disc players and variety of CD titles......Page 90
3.7.3 Software piracy......Page 91
3.8 Exercises......Page 92
3.9 Selected References......Page 94
4.1 New Technology Adoption: A Static Approach......Page 97
4.2 Technology Revolutions: A Dynamic Approach......Page 99
4.2.1 Technology improvements......Page 101
4.2.2 Consumers and changing technologies......Page 103
4.2.3 New technology adoption......Page 104
4.2.4 Calculating the duration of technologies......Page 106
4.3 International Standardization......Page 107
4.3.1 General background about international standardization......Page 108
4.3.2 A model with international network externalities......Page 109
4.4 Exercises......Page 113
4.5 Selected References......Page 114
5. Telecommunication......Page 117
5.1.1 The demand for telecommunication services......Page 118
5.1.2 Monopoly telecommunication service provider......Page 121
5.1.4 Entry of new firms into the telecommunication industry......Page 122
5.1.5 Extension to three consumer types......Page 124
5.2 Telecommunication: A Calculus Analysis......Page 125
5.2.1 The demand for telecommunication services......Page 126
5.2.2 Monopoly provider: The zero-connection cost case......Page 129
5.2.3 Monopoly provider: Connection-cost case......Page 130
5.2.4 Entry of new firms into the telecommunication industry......Page 131
5.3 Interconnections......Page 133
5.3.1 Access pricing: Basic methods......Page 135
5.3.2 “Two-way” access pricing under regional monopolies......Page 137
5.3.3 International phone calls settlement rates......Page 141
5.4 Exercises......Page 146
5.5 Selected References......Page 149
6. Broadcasting......Page 151
6.1.1 Scheduling competition......Page 152
6.1.2 Program-type competition......Page 161
6.1.3 Cable TV: The effect of local monopolies......Page 163
6.2 Spectrum Allocation......Page 165
6.2.1 Lotteries......Page 166
6.2.2 Auctions......Page 168
6.3 Digital Convergence......Page 171
6.3.1 Prederegulation......Page 172
6.3.2 Partial deregulation......Page 173
6.3.3 Complete deregulation......Page 174
6.4 Exercises......Page 175
6.5 Selected References......Page 177
7. Markets for Information......Page 179
7.1.1 Classification of information reproduction......Page 180
7.1.2 Copy protection: Digital versus nondigital media......Page 182
7.1.3 The built-in copy protection of printed media......Page 183
7.1.4 Captured and uncaptured surplus from copying......Page 184
7.2.1 What is a library?......Page 186
7.2.2 How the value of a library is determined......Page 187
7.2.3 Pricing library services......Page 188
7.3.1 Historical development of the Internet......Page 191
7.3.2 Pricing Internet services: A calculus analysis......Page 192
7.3.3 Internet commerce......Page 195
7.3.4 Taxing Internet commerce......Page 196
7.4 Pricing Information Goods......Page 198
7.5 Exercises......Page 200
7.6 Selected References......Page 201
8. Banks and Money......Page 203
8.1 Switching Costs and Competition......Page 204
8.1.1 A model of switching costs and fee competition......Page 205
8.1.2 Empirical estimations of switching costs......Page 207
8.2.1 Overview of ATMs......Page 212
8.2.2 A model of bank competition with ATMs......Page 213
8.3.1 Money and network effects......Page 217
8.3.2 Coexistence of different payment instruments......Page 221
8.4 Exercises......Page 227
8.5 Selected References......Page 228
9. The Airline Industry......Page 231
9.1 Network Structures and Network Economies......Page 232
9.2 Deregulation and Entry......Page 234
9.2.1 A single monopoly airline......Page 235
9.2.2 Partial deregulation and partial entry......Page 237
9.3.1 Frequency of flights and airfare competition......Page 240
9.3.2 Code sharing and profits......Page 242
9.4 Exercises......Page 245
9.5 Selected References......Page 247
10. Social Interaction......Page 249
10.1.1 A  model of status-seeking......Page 250
10.1.2 A model of conformism......Page 252
10.2 Conformity, Vanity, and Price Competition......Page 253
10.3 The Economics of Entertainment Places......Page 256
10.4 Gifts......Page 258
10.4.1 Cash versus gifts-in-kind: A graphical illustration......Page 260
10.4.2 A general model of gift giving and receiving......Page 261
10.5 Exercises......Page 264
10.6 Selected References......Page 265
11. Other Networks......Page 267
11.1.1 Major observations......Page 268
11.1.2 A model of diversity of languages......Page 269
11.2 Religious Affliations as Networks......Page 275
11.2.1 A basic model of religious affiliation......Page 276
11.2.2 Democratic religions......Page 279
11.2.3 Profit-making religions......Page 283
11.3 Lawsuits and Lawyers......Page 285
11.3.1 The demand for legal services......Page 287
11.3.2 Equilibrium fees......Page 291
11.3.3 Variable productivity: A generalization......Page 292
11.4 International Time Coordination......Page 295
11.5 Who’s Driving on the “Wrong” Side of the Road?......Page 296
11.6 Exercises......Page 297
11.7 Selected References......Page 300
A.1.1 Tools and applications......Page 301
A.2 What is a Game?......Page 302
A.3.1 Equilibrium in dominant actions......Page 305
A.3.2 Nash equilibrium (NE)......Page 308
A.4 Best-Response Functions......Page 310
A.6 Exercises......Page 312
Appendix B: Extensive-Form Games......Page 315
B.1 Defining Strategies and Outcomes in Extensive-Form Games......Page 316
B.2 A Normal-Form Representation for Extensive-Form Games......Page 317
B.3 Subgames and Subgame-Perfect Equilibria......Page 318
B.4 Exercises......Page 321
C.1 The Simplest Product Differentiation Model......Page 323
C.2 Nonexistence of a Nash-Bertrand Equilibrium......Page 324
C.3 The Undercut-Proof Equilibrium......Page 325
C.4 Four Important Properties of the UPE......Page 326
C.5 Exercises......Page 327
C.6 Selected References......Page 328
Index......Page 329