Measuring Quality Change due to Technological Externality in Multi-Feature Service Bundles

Technological innovation, externalities and network effects keep shifting the preference parameters in cellular telecommunication service sector. The paper suggests a framework to model these changes.It notes two channels that affect the service prices (in possibly opposite ways). In each corresponding period, consumer with lower reservation prices are shopping for the services. But these reservation prices are going up due to complementarity/ network effects. Under some reasonable assumptions on industry and cost structure, market data can be used to identify these changes. A price index is suggested that decomposes service bundle price changes into the change in price for same-quality of service and change in quality of the service bundle. Some interesting properties of these indexes are also discussed.

NETWORK EXTERNALITY ON RETAILER AND SUPPLIER PRICING STRATEGIES FOR COMPETITIVE PRODUCTS

Network externality, which affects the value of many high-tech and Internet-related products, may have a critical impact on firm strategies. This paper focuses on the strategy selection of various players in a channel structure. We design a sequential game among two suppliers and a retailer. In the developed game and model, we provide two optional strategies to the retailer, whereas suppliers can impact retailer strategies with their own pricing. We found that (direct) network externality typically had a positive effect on firms. More important, we conclude that when the degree of product network externality from a weak supplier reaches a certain scale, a relatively stable state of competition is facilitated, which is more profitable compared with a collusion strategy. Otherwise, the two suppliers can still maintain a competition relationship. However, a collusion strategy may be more profitable than competition in the second case. In this article, we recommend an acquisition strategy as a sustainable and reasonable collusion strategy

Challenging content exclusivity in network industries: the case of digital broadcasting

Interacting with network externalities and switching costs, exclusive dealings for premium contents in digital broadcasting markets allow incumbents to deny rivals critical mass and profitable market entry. A downstream company that acquires the exclusive rights to high-quality programming in the upstream market may obtain a competitive advantage over its rivals which suffer from negative externalities. Instead of fostering competition and innovation, exclusive licensing serves as an effective entry-deterrent strategy in order to preserve market power and to leverage monopolies. Although exclusivity for premium content has long been considered the only way for guaranteeing the remuneration of the vast investments in content production and platform infrastructure, this paper challenges the profitability of this exclusivity strategy in network industries. The paper questions the traditional economic assumptions underlying exclusivity of content and argues that the increasing emergence of multi-sided platforms in the broadcasting industry creates incentives for right holders to multi-home rather than single-home their contents. --Business model,digital broadcasting,exclusivity,bundling,shared access,innovation

Integration of On-Premises and Cloud-Based Software: The Product Bundling Perspective

Firms in the cloud-computing era are facing the critical issue of integrating on-premises software and cloud-based software services. To date, the software industry has designed two different types of integration methods—an enterprise service bus (ESB) and an integration platform as a service (iPaaS). However, there are conflicting views on when and how to use these different integration methods to fulfill integration needs. This study aims to resolve this confusion through economic modeling. By focusing on the indirect network effect and following a two-product bundling framework, we establish a stylized model to investigate optimal pricing and bundling decisions and the best integration choice. Our findings contradict common perceptions that an iPaaS is the better choice for integration and show that firms can derive higher value by adopting ESB to integrate on-premises software and cloud-based software services. Conceptually, given that the overall network value received from a cloud-based software service is higher, the use of ESB can contribute toward significantly improving the total value of the two software applications. We also find that unbundling is the best marketing strategy for firms because software integration can improve the valuation of individual software. Our findings have important implications for software vendors. They suggest that vendors can leverage a higher network value from the software service by integrating it with on-premises software applications through ESB rather than iPaaS and eventually realize higher profits by extracting more value from consumers. Since integration increases the value of individual products, vendors should sell them separately instead of offering them as a bundle

Does public service broadcasting serve the public? The future of television in the changing media landscape

The media landscape is subject to substantial technological change. In this Discussion Paper, we analyse how technological trends affect the economic rationale for PSB. After identifying the aims and nature of PSB, we derive eight possible market failures from the specific economic characteristics of information. The changing relevance of these market failures is subsequently discussed in the light of the technological changes. Based on this analysis, we argue that public service broadcasting (PSB) for the digital age should be light in the sense that it has a much smaller mandate. The main reason for this conclusion is that, due to technological developments, many market failures in the broadcasting industry are no longer relevant. The broadcasting market thus functions more and more like a normal market. This implies that the allocation tends to the efficient outcome, as long as consumer valuation is properly accounted for. This is not the case when there are externalities and possibly not when it comes to valuing quality. In the presence of these market failures, an efficient allocation is not warranted in the broadcasting industry. It is these remaining market failures that give a future PSB a right to exist.

Invention under uncertainty and the threat of ex post entry

This paper proposes a theoretical framework for studying the invention of new products when demand is uncertain. In this framework, under general conditions, the threat of ex post entry by a competitor can deter invention ex ante. Asymmetric market power in the ex post market exacerbates the problem. The implications of these general results are examined in a series of examples that represent important markets in the computer industry. The first is a model that shows how an operating system monopolist, by its mere presence, can deter the invention of complements, to its own detriment as well as that of society. The implications of policies such as patent protection, price regulation, and mandatory divestiture are considered. Three additional examples consider the ability of a monopolist in one market to commit to bundling an unrelated product, a pair of horizontally differentiated firms that can add a new feature to their products, and a platform leader that can be challenged in its base market by the supplier of a complementary product.Invention, innovation, demand uncertainty, ex post entry, bundling, Intel, Microsoft, Netscape

Do market failures hamper the perspectives of broadband?

This report analyses the broadband market and asks whether a specific role of government is necessary. As broadband telecommunication is seen as a source of productivity gains, the European Union and other regions are encouraging the deployment of a secure broadband infrastructure. In the Netherlands, there is some concern whether the supply of broadband capacity will meet the strongly increasing demand. The main conclusions are that presently, given current broadband policy, no considerable market failures exist. Firms have adequate incentives to invest in broadband, partly induced by specific regulation of access to the local copper loop. Hence, there is no need for changes in current broadband policy. Market failures in terms of knowledge spillovers are taken care of by other policies. As the broadband markets are very dynamic, unforeseen developments may emerge such as the appearance of new dominant techniques and market players. The best strategy for the government, in particular the competition authority, is to continuously monitor these markets, making timely intervention easier when needed.

Co-ordination and Lock-in: Competition with Switching Costs and Network Effects

Switching costs and network effects bind customers to vendors if products are incompatible, locking customers or even markets in to early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in effciency, and gives vendors lucrative ex post market power-over the same buyer in the case of switching costs (or brand loyalty), or over others with network effects. Firms compete ex ante for this ex post power, using penetration pricing, introductory offers, and price wars. Such "competition for the market" or "life-cycle competition" can adequately replace ordinary compatible competition, and can even be fiercer than compatible competition by weakening differentiation. More often, however, incompatible competition not only involves direct effciency losses but also softens competition and magnifies incumbency advantages. With network effects, established firms have little incentive to offer better deals when buyers’ and complementors’ expectations hinge on non-effciency factors (especially history such as past market shares), and although competition between incompatible networks is initially unstable and sensitive to competitive offers and random events, it later "tips" to monopoly, after which entry is hard, often even too hard given incompatibility. And while switching costs can encourage small-scale entry, they discourage sellers from raiding one another’s existing customers, and s also discourage more aggressive entry. Because of these competitive effects, even ineffcient incompatible competition is often more profitable than compatible competition, especially for dominant rms with installed-base or expectational advantages. Thus firms probably seek incompatibility too often. We therefore favor thoughtfully pro-compatibility public policy.