Dynamic Price Competition with Persistent Consumer Tastes

The dynamic price competition in a horizontally differentiated duopoly when consumers value previous market shares is analyzed. The conditions for the existence of stable Markov-Perfect Equilibrium(MPE) in linear strategies are established. When they exist, the optimal pricing policies suggest that a firm with a higher previous market share charges a higher price, all else equal. It is possible to observe pricing below cost for some periods. In the steady state, the MPE leads to a more competitive outcome (lower prices) than the case where there is no persistence in consumer tastes. The model can produce outcomes where the steady state is reached very slowly which provides an alternative explanation for slow emergence of competition when entrants face an established incumbent: It may be due to persistence in consumer tastes.

Exclusive dealing with network effects

This paper explores the ability of an incumbent to use exclusive deals or introductory offers to dominate a market in the face of entry when network effects rather than scale economies are present. When consumers can only join one or other firm, the incumbent will make discriminatory o ers that are anticompetitive and ine cient. Allowing consumers to multihome, we find o ers that only require consumers to commit to purchase from the incumbent are not anticompetitive, while contracts which prevent consumers from also buying from the entrant in the future are anticompetitive and ine cient. The finding extends to two-sided markets, where the incumbent signs up "sellers" exclusively with attractive offers and exploits "buyers"

Estimating network effects in mobile telephony in Germany

In this paper we analyze the demand for mobile telecommunication services in Germany in the period from January 1998 to June 2003. During this time, the subscriber base grew exponentially by about 700% while prices declined only moderately by about 41%. We believe that prices alone cannot account for such rapid diusion and network eects have inuenced the evolution of the industry. We put this view to the test by using publicly available data on subscriptions, price indices and churn rates. Using churn rates gave us approximate sales levels which enabled us to use standard methods to investigate the eect of network size on demands. Our estimates of a system of demand functions show that network eects played a signicant role in the diusion of mobile services in Germany

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’.

Welfare improving product bans

We formulate a model of vertical differentiation to evaluate the welfare effects of removing a low quality product from the market. The mechanism through which a welfare improvement might arise is simple: Once the low quality low cost alternative is banned, entry into the high quality segment becomes more likely. This in turn may lead to a significant reduction in the price of the high quality product. We find that such a ban might improve aggregate welfare when consumers value the higher quality more, the marginal cost of producing high quality is lower, the price of low quality is higher, and the price sensitivity for high quality is not too high

Portfolio optimization when risk factors are conditionally varying and heavy tailed

Assumptions about the dynamic and distributional behavior of risk factors are crucial for the construction of optimal portfolios and for risk assessment. Although asset returns are generally characterized by conditionally varying volatilities and fat tails, the normal distribution with constant variance continues to be the standard framework in portfolio management. Here we propose a practical approach to portfolio selection. It takes both the conditionally varying volatility and the fat-tailedness of risk factors explicitly into account, while retaining analytical tractability and ease of implementation. An application to a portfolio of nine German DAX stocks illustrates that the model is strongly favored by the data and that it is practically implementable. Klassifizierung: C13, C32, G11, G14, G18Die Bewertung von Risiken und die optimale Zusammensetzung von Wertpapier-Portfolios hängt insbesondere von den für die Risikofaktoren gemachten Annahmen bezüglich der zugrunde liegenden Dynamik und den Verteilungseigenschaften ab. In der empirischen Finanzmarkt-Analyse ist weitestgehend akzeptiert, daß die Renditen von Finanzmarkt-Zeitreihen zeitvariierende Volatilität (HeteroskedastizitÄat) zeigen und daß die bedingte Verteilung der Renditen von der Normalverteilung abweichende Eigenschaften aufweisen. Insbesondere die Enden der Verteilung weisen eine gegenüber der Normalverteilung höhere Wahrscheinlichkeitsdichte auf ('fat-tails') und häufig ist die beobachtete Verteilung nicht symmetrisch. Trotzdem stellt die Normalverteilungs-Annahme mit konstanter Varianz weiterhin die Basis für den Mittelwert-Varianz Ansatz zur Portfolio-Optimierung dar. In der vorliegenden Studie schlagen wir einen praktikablen Ansatz zur Portfolio-Selektion mit einem Mittelwert-Skalen Ansatz vor, der sowohl die bedingte Heteroskedastizität der Renditen, als auch die von der Normalverteilung abweichenden Eigenschaften zu berücksichtigen in der Lage ist. Wir verwenden dazu eine dem GARCH Modellähnliche Dynamik der Risikofaktoren und verwenden stabile Verteilungen anstelle der Normalverteilung. Dabei gewährleistet das von uns vorgeschlagene Faktor-Modell sowohl gute analytische Eigenschaften und ist darüberhinaus auch einfach zu implementieren. Eine beispielhafte Anwendung des vorgeschlagenen Modells mit neun Aktien aus dem Deutschen Aktienindex veranschaulicht die bessere Anpassung des vorgeschlagenen Modells an die Daten und demonstriert die Anwendbarkeit zum Zwecke der Portfolio-Optimierung

Licensing of a drastic innovation with product differentiation

We analyze the licensing of a drastic innovation when products are differentiated due to consumer and/or product heterogeneity. We show that an industry insider prefers to divest its production arm and license the new technology as an industry outsider, in which case it can replicate multiproduct monopoly profits. We derive the optimal contracts and the optimal number of licenses by assuming a logit demand system. Optimal number of licenses, quite strikingly, increases when the technology has a higher relative value than a commercialized alternative. This result stands in sharp contrast with the literature on the licensing of a homogenous good

Portfolio Optimization wehn Risk Factors are Conditionally Varying and Heavy Tailed

Assumptions about the dynamic and distributional behavior of risk factors are crucial for the construction of optimal portfolios and for risk assessment. Although asset returns are generally characterized by conditionally varying volatilities and fat tails, the normal distribution with constant variance continues to be the standard framework in portfolio management. Here we propose a practical approach to portfolio selection. It takes both the conditionally varying volatility and the fat-tailedness of risk factors explicitly into account, while retaining analytical tractability and ease of implementation. An application to a portfolio of nine German DAX stocks illustrates that the model is strongly favored by the data and that it is practically implementable.Multivariate Stable Distribution, Index Model, Portfolio Optimization, Value-at-Risk, Model Adequacy

Economics of collective refusals to supply

This paper examines situations where vertically integrated firms refuse to supply an input to an independent competitor in the downstream market. The treatment of such cases by competition or regulatory authorities is based on the assumption that such outcomes can only arise if there is collusion in the upstream markets. We argue that this is not always the case. In particular, we argue that proper antitrust or regulatory assessment of such cases requires analysis of the nature of competition, the shape and elasticity of the demand curve, the observability of upstream contracts, and even the number of potential downstream competitors

Licensing with Free Entry

The literature on the licensing of an innovation has mainly focused on some speci c contract types. We show within the framework of a fairly general model that removing these contractual limitations will lead to extreme market outcomes. Speci cally, we nd that when the patentee can employ observable contracts that can condition on market entry, it can achieve the monopoly outcome. Furthermore, when the patentee can only use unconditional quantity forcing contracts, it captures the entire market, albeit not at monopoly price, via a single licensee. Our results point out to the signi cance, and perhaps the particularity, of observable, nonrenegotiable contracts