On the (Mis-) Alignment of Consumer and Social Welfare in Markets with Network Effects

We analyze duopoly Bertrand competition under network effects. We consider both incompatible and compatible products. Our main result is that network effects create a fundamental conflict between the maximization of social welfare and consumer surplus whenever products are incompatible. While consumer surplus is highest in the symmetric equilibrium, social welfare is highest in the asymmetric equilibrium. We also show that both consumer surplus and social welfare are higher in any equilibrium under compatibility when compared with incompatible products. However, .firms never have strict incentives to achieve compatibility. Finally, we show the robustness of our results when products are horizontally differentiated.Bertrand duopoly, network effects, (In-) compatibility, welfare

Mix-and-match compatibility in asymmetric system markets

This paper shows that the private incentive for mix-and-match compatibility in system markets diverges from the social planner's incentive if competing suppliers are asymmetric in production cost or product quality. There can be too much or too little compatibility when the market is served by fully integrated system suppliers. Also, the market outcome involves socially too much incompatibility in the form of exclusive technological alliances when the market is composed of independent component suppliers. These results contrast with the standard one obtained in the symmetric setup and shed new light on public policy towards compatibility, technological alliances, and bundling practices in system markets

Multihoming and compatibility

This paper analyzes the consequences of multihoming on private and social incentives for compatibility. Multihoming occurs in our model when consumers buy from both of two competing firms so as to capture network benefits. We address whether the ability of consumers to multihome means policymakers do not need to worry about compatibility between ‘networks’.

Open Source vs. Proprietary Software: Competition and Compatibility

We use a Hotelling linear city model to study competition between open source and proprietary software, where only the producer of the proprietary software aims at maximizing the profit. The producer of the proprietary software must decide on compatibility. Different compatibility strategies will lead to different network externality, and thus result in different profit for the producer of the proprietary software. We found that the proprietary producer¡¯s choice of compatibility strategy depends on the market coverage conditions. When the market is fully covered, one-way compatibility is the best strategy for the proprietary software. When the market is partly covered, two-way compatibility is the best strategy. Such results are not affected by software quality. Furthermore, when the provider of the open source software pursues the maximum market share rather than reacts passively, two-way compatibility would be the best choice for both the open source and the proprietary software. Moreover, the proprietary software producer does not favor its proprietary rival changing to open source software. Such a change may lower the social welfare.Open Source Software, Proprietary Software, Compatibility, Competition

Open Source vs. Proprietary Software: Competition and Compatibility

e use a Hotelling linear city model to study competition between open source and proprietary software, where only the producer of the proprietary software aims at maximizing the profit. The producer of the proprietary software must decide on compatibility. Different compatibility strategies will lead to different network externality, and thus result in different profit for the producer of the proprietary software. We found that the proprietary producer¡¯s choice of compatibility strategy depends on the market coverage conditions. When the market is fully covered, one-way compatibility is the best strategy for the proprietary software. When the market is partly covered, two-way compatibility is the best strategy. Such results are not affected by software quality. Furthermore, when the provider of the open source software pursues the maximum market share rather than reacts passively, two-way compatibility would be the best choice for both the open source and the proprietary software. Moreover, the proprietary software producer does not favor its proprietary rival changing to open source software. Such a change may lower the social welfare.Open Source Software, Proprietary Software, Compatibility, Competition

Exploring the components, asymmetry and distribution of relationship quality in wild Barbary macaques (Macaca sylvanus)

Social relationships between group members are a key feature of many animal societies. The quality of social relationships has been described by three main components: value, compatibility and security, based on the benefits, tenure and stability of social exchanges. We aimed to analyse whether this three component structure could be used to describe the quality of social relationships in wild Barbary macaques (Macaca sylvanus). Moreover, we examined whether relationship quality was affected by the sex, age and rank differences between social partners, and investigated the asymmetric nature of social relationships. We collected over 1,900 hours of focal data on seven behavioural variables measuring relationship quality, and used principal component analysis to investigate how these variables clustered together. We found that relationship quality in wild Barbary macaques can be described by a three component structure that represents the value, compatibility and security of a relationship. Female-female dyads had more valuable relationships and same-age dyads more compatible relationships than any other dyad. Rank difference had no effect on the quality of a social relationship. Finally, we found a high degree of asymmetry in how members of a dyad exchange social behaviour. We argue that the asymmetry of social relationships should be taken into account when exploring the pattern and function of social behaviour in animal societies

Social Capital and Incentive Compatibility: Modelling the Accumulation and Use of Social Collateral

In economics, where the long resistance to reflecting on the effects of social interaction on economic behaviour is slowly waning, the concept of social capital may turn out to be a useful analytical tool. However, initial interest in social capital has produced a large variety of definitions, theoretical frameworks, empirical analyses, and even policy prescriptions. This paper provides a selective review and critique of some of the more recent literature on social capital. It then suggests that many of the problems in the existing literature can be addressed by lowering aspirations about what social capital is and reformulating it in terms of its impact on incentive problems in economic transactions in the presence of imperfect markets and costly or non-enforceable contracts. The paper finally advances a model of one of the ways that social capital resolves incentive compatibility problems, namely its role as a collateral assetSocial Capital; Incentive Compatibility; Social Collateral; Credit

Social Capital and Incentive Compatibility: Modelling the Accumulation and Use of Social Collateral

In economics, where the long resistance to reflecting on the effects of social interaction on economic behaviour is slowly waning, the concept of social capital may turn out to be a useful analytical tool. However, initial interest in social capital has produced a large variety of definitions, theoretical frameworks, empirical analyses, and even policy prescriptions. This paper provides a selective review and critique of some of the more recent literature on social capital. It then suggests that many of the problems in the existing literature can be addressed by lowering aspirations about what social capital is and reformulating it in terms of its impact on incentive problems in economic transactions in the presence of imperfect markets and costly or non-enforceable contracts. The paper finally advances a model of one of the ways that social capital resolves incentive compatibility problems, namely its role as a collateral asset.

A Note on Jackson's Theorems in Bayesian Implementation

This note shows that in an incomplete information situation the closure condition will be satisfied by all social choice sets if and only if the set of states of the society which all agents believeoccur with positive probability satisfies the `connection' condition.It then follows from Jackson''s [1] fundamental theorems that whenever `connection'' is satisfied and there are at least three agents in the society, for the implementability of social choice sets in Bayesian equilibrium the incentive compatibility and Bayesian monotonicity conditions are both necessary and sufficient in economic environments. It also follows that the incentive compatibility and monotonicity-no-veto conditions are sufficient in noneconomic environments.Bayesian implementation incomplete information

A Characterization of Virtual Bayesian Implementation

We provide a characterization of virtual Bayesian implementation in pure strategies for environments satisfying no-total-indifference. A social choice function in such environments is virtually Bayesian implementable if and only if it satisfies incentive compatibility and a condition we term virtual monotonicity. The latter is weaker than Bayesian monotonicity - known to be necessary for Bayesian implementation. Virtual monotonicity is weak in the sense that it is generically satisfied in environments with at least three alternatives. This implies that in most environments virtual Bayesian implementation is as successful as it can be (incentive compatibility is the only condition needed).Virtual monotonicity, Bayesian monotonicity, Maskin monotonicity, virtual Bayesian implementation, incentive compatibility, type diversity, decentralization, incomplete information