Beef up Your Competitor: A Model of Advertising Cooperation between Internet Search Engines

We propose a duopoly model of competition between internet search engines endowed with different technologies and study the effects of an agreement where the more advanced firm shares its technology with the inferior one. We show that the superior firm enters the agreement only if it results in a large enough increase in demand for advertising space at the competing .rm and a relatively small improvement of the competitor's search quality. Although the superior firm gains market share, the agreement is beneficial for the inferior firm, as the later firm's additional revenues from a higher advertising demand outweigh its losses due to a smaller user pool. The cooperation is likely to be in line with the advertisers' interests and to be detrimental to users' welfare.Search Engine, Two-Sided Market, Advertising, Strategic Complements, Technology

Strategic Investment in International Gas-Transport Systems: A Dynamic Analysis of the Hold-up Problem

We develop a dynamic model of strategic investment in a transnational pipeline system. In the absence of international contract enforcement, countries may distort investment in order to increase their bargaining power, resulting in overinvestment in expensive and underinvestment in cheap pipelines. With repeated interaction, however, there is a potential to increase efficiency through dynamic collusion. In the theoretical part we establish a fundamental asymmetry: it is easier to avoid overinvestment than underinvestment. Calibrating the model to fit the Eurasian pipeline system for natural gas, we find that the potential to improve efficiency through dynamic cooperation is large. In reality, however, only modest improvements over the non-cooperative solution have been achieved.Multilateral bargaining, Hold-up, irreversible investment, collusion

Bertrand Competition in Markets with Network Effects and Switching Costs

We analyze market dynamics under Bertrand duopoly competition in industries with network effects and consumer switching costs. Consumers form installed bases, repeatedly buy the products, and differ with respect to their switching costs. Depending on the ratio of switching costs to network effects, our model generates convergence to monopoly as well as market sharing as equilibrium outcomes. Convergence can be monotone or alternating in both scenarios. A critical mass effect, where consumers are trapped into one technology for sure only occurs for intermediate values of switching costs, whereas for large switching costs market sharing is the unique equilibrium and for small switching costs both monopoly and market sharing equilibria emerge. We also analyze stationary and stable equilibria, where we show that a monopoly outcome is almost inevitable, if switching costs or network effects increase over time. Finally, we examine firms' incentives to make their products compatible and to create additional switching costs.Network effects, switching costs, Bertrand competition, market dynamics

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

Baltic Sea Pipeline: The Profits Will Be Distributed Differently

In late 2005, the German energy companies E.ON and Wintershall and Russian Gazprom reached an agreement to build a new huge pipeline Nord Stream through the Baltic Sea. This pipeline will provide Russia for the first time ever with the direct access to its Western European customers. This pipeline will contribute to the security of the Western Europe's energy supply through creating an alternative supply opportunity for the case when conflicts with the current transit states lead to disruptions in supply. The realization of the project will also shift the bargaining power from the transit states to the benefit of both Russia and the Western European natural gas importers. Particularly, White Russia as well as the Ukraine will have to accept lower transit fees in the future and have fewer means left to enforce special conditions for their own natural gas imports. The decision to construct the pipeline can be viewed as a consequence of institutional and political weaknesses in the transit states.Multilateral bargaining, Hold-up, Irreversible investment, Collusion

Technology licensing by advertising supported media platforms: An application to internet search engines

We develop a duopoly model with advertising supported platforms and analyze incentives of a superior firm to license its advanced technologies to an inferior rival. We highlight the role of two technologies characteristic for media platforms: The technology to produce content and to place advertisements. Licensing incentives are driven solely by indirect network effects arising fromthe aversion of users to advertising. We establish a relationship between licensing incentives and the nature of technology, the decision variable on the advertiser side, and the structure of platforms' revenues. Only the technology to place advertisements is licensed. If users are charged for access, licensing incentives vanish. Licensing increases the advertising intensity, benefits advertisers and harms users. Our model provides a rationale for technology-based cooperations between competing platforms, such as the planned Yahoo-Google advertising agreement in 2008. --Technology Licensing,Two-Sided Market,Advertising

Bertrand competition in markets with network effects and switching costs

We analyze Bertrand duopoly competition in markets with network effects and consumer switching costs. Depending on the ratio of switching costs to network effects, our modelerates four different market patterns: monopolization and market sharing which can be either monotone or alternating. A critical mass effect, where one firm becomes the monopolist for sure only occurs for intermediate values of the ratio, whereas for large switching costs market sharing is the unique equilibrium. For large network effcts both monopoly and market sharing equilibria exist. Our welfare analysis reveals a fundamental conflict between maximization of consumer surplus and social welfare when network effects are large. We also analyze firms' incentives for compatibility and we examine how market outcomes are affected by the switching costs, market expansion, and cost asymmetries. Finally, in a dynamic extension of our model, we show how competition depends on agents' discount factors. --Network Effects,Switching Costs,Bertrand Competition

Joint Customer Data Acquisition and Sharing among Rivals

It is increasingly observable that in different industries competitors jointly acquire and share customer data. We propose a modified Hotelling model with two-dimensional consumer heterogeneity to analyze the incentives for such agreements and their welfare implications. In our model the incentives of firms for data acquisition and sharing depend on the willingness of consumers to switch brands. Firms jointly collect data on transportation cost parameters when consumers are relatively immobile between brands. However, the firms are unlikely to cooperatively acquire such data, when consumers are relatively mobile. Incentives to share information depend on the portfolio of data firms hold and consumer mobility. Data sharing arises with relatively mobile and immobile consumers - it is neutral for consumers in the former case, but reduces consumer surplus in the latter. Competition authorities ought to scrutinize such cooperation agreements on a case-by-case basis and devote special attention to consumer switching behavior.Information Sharing, Data Acquisition, Price Discrimination

Technology Adoption in Critical Mass Games: Theory and Experimental Evidence

We analyze the choices between two technologies A and B that both exhibit network effects. We introduce a critical mass game in which coordination on either one of the standards constitutes a Nash equilibrium outcome while coordination on standard B is assumed to be payoff-dominant. We present a heuristic definition of a critical mass and show that the critical mass is inversely related to the mixed strategy equilibrium. We show that the critical mass is closely related to the risk dominance criterion, the global game theory, and the maximin criterion. We present experimental evidence that both the relative degree of payoff dominance and risk dominance explain players' choices. We finally show that users' adoption behavior induces firms to select a relatively unrisky technology which minimizes the problem of coordination failure to the benefit of consumers.

Выбор метода факторизации в зависимости от исследовательской ситуации: практические рекомендации

It is a common practice among social scientists to use “factor analysis” and “principal components analysis” interchangeably, even though PCA is not a factor extraction method, but a dimension reduction technique. Most of the recent studies with factor analysis rely solely on PCA or fail to specify which factor extraction method was used. Supposedly, it is caused by the lack of structured and comprehensive guidance on the selection of factor extraction methods. The aim of this study is to develop a theoretically and empirically justified algorithm of factor extraction method selection, depending on a combination of research context features, such as (a) sample size, (b) number of indicators specifying each factor, (c) size, (d) range of communalities, (e) presence of model error and (f) distribution of indicators. Seven factor extraction methods were studied: principal component analysis, weighted and generalized least squares method, maximum likelihood method, principal axis analysis, alpha-factor analysis, and image factoring. Theoretically justified algorithm was created and tested via statistical experiment with Monte Carlo simulation. Following the general outline of previous works’ experimental designs, we specified factor loadings matrices for each research context with nonzero loadings, derived correlation matrices and produced 500 Monte Carlo simulated samples (3000 samples in total) per research context. Every factor extraction method was applied to every sample and the resulting factor loadings matrices and communalities were recorded and summarized. Four criteria of factor analysis extraction adequacy were applied: squared mean errors of factor loadings, squared mean errors and absolute mean errors of communalities, and number of Heywood cases. As a result we formulated four main recommendations: it is advised to use (1) principal axis analysis or alpha-factor analysis, if a model error is suspected, (2) maximum likelihood method or generalized least squares method, if the sample is large enough and indicators are normally distributed, or vice versa, if the sample is not large enough and distribution of indicators differs from normal, (3) maximum likelihood method, if the sample is large enough, but the indicators are not normally distributed, or if the indicators are normally distributed, but the sample size is not large enough and the communalities are small, (4) generalized least squares method, if the indicators are normally distributed and the communalities are large, but the sample size is not large enough