Mergers in Emerging Markets with Network Externalities: The Case of Telecoms

This paper develops a unifying framework to understand competition issues in networkindustries. It focuses on the telecom(munication) industry and takes two specific effectsof this industry into account. First, the telecom industry is in continuous evolution andalliances affect not only the current market power of the firms but also the evolution ofthe industry. Second, the production of services in the industry is evolving towards theprovision of integrated services in a "system" that benefits from strong "networkexternalities". The analysis suggests that the antitrust authorities should capture as wellsuch effects as the magnitude of the installed bases, the compatibility of the alliance’ssystem with other systems, the switching costs for customers and application writers,and the "credibility" of the alliance to offer the service. The developed frameworkbuilds on the existing models of networks and combines the different network effects. The relevance of the framework is shown for two important merger cases (WorldCom-MCI and MSG cases), involving respectively an existing market and an emerging one. ZUSAMMENFASSUNG - (Unternehmenszusammenschlüsse in entstehenden Märkten mit Netzexternalitäten: Das Beispiel der Telekommunikationsindustrie) In diesem Beitrag wird ein einheitlicher Bezugsrahmen zur Analyse des Wettbewerbs in Netzwerkindustrien entwickelt. Er zielt auf die Analyse der Telekommunikationsindustrie ab und berücksichtigt dabei spezielle Effekte dieser Industrie. Erstens ist die Telekommunikationsindustrie durch eine stetige Evolution gekennzeichnet und Allianzen zwischen den Unternehmen beeinflussen nicht nur die aktuelle Marktmacht der Unternehmen, sondern auch die Entwicklung der Industrie. Zweitens entwickelt sich die Produktion der Dienste in dieser Industrie immer stärker in Richtung auf das Angebot integrierter Dienste (Systemangebote), die Vorteile aus Netzexternalitäten nutzen. Die Analyse zeigt auch, daß die Wettbewerbsbehörden ebenfalls Merkmale wie die Anzahl der verfügbaren Anschlüsse, die Kompatibilität des Systems der Allianz mit anderen Systemen, die Wechselkosten der Kunden sowie die Glaubwürdigkeit der Dienstleistungsqualität der Allianz berücksichtigen sollten. Der entwickelte Bezugsrahmen stützt sich auf die vorhandenen Netzmodelle und kombiniert die unterschiedlichen Netzeffekte und -merkmale. Die Bedeutung des Ansatzes wird am Beispiel von zwei wichtigen Fusionsfällen aufgezeigt (WorldCom-MCI und MSG), bei denen es sich jeweils um einen existierenden und einen entstehenden Markt handelt.

Moral Hazard and Capital Structure Dynamics

We base a contracting theory for a start-up firm on an agency model with observable but nonverifiable effort, and renegotiable contracts. Two essential restrictions on simple contracts are imposed: the entrepreneur must be given limited liability, and the investor’s earnings must not decrease in the realized profit of the firm. All message game contracts with pure strategy equilibria (and no third parties) are considered. Within this class of contracts/equilibria, and regardless of who has the renegotiating bargaining power, debt and convertible debt maximize the entrepreneur’s incentives to exert effort. These contracts are optimal if the entrepreneur has the bargaining power in renegotiation. If the investor has the bargaining power, the same is true unless debt induces excessive effort. In the latter case, a non-debt simple contract achieves efficiency — the non-contractibility of effort does not lower welfare. Thus, when the non-contractibility of effort matters, our results mirror typical capital structure dynamics: an early use of debt claims, followed by a switch to equity-like claims.Moral hazard, renegotiation, convertible debt, capital structure

Academic Freedom, Private-Sector Focus, and the Process of Innovation

We develop a model that clarifies the respective advantages and disad- vantages of academic and private-sector research. Our model assumes full protection of intellectual property rights at all stages of the development process, and hence does not rely on lack of appropriability or spillovers to generate a rationale for academic research. Instead, we focus on control- rights considerations, and argue that the fundamental tradeoff between academia and the private sector is one of creative control versus focus. By serving as a precommitment mechanism that allows scientists to freely pursue their own interests, academia can be indispensable for early-stage research. At the same time, the private sector's ability to direct scientists towards higher-payo¤ activities makes it more attractive for later-stage re- search.

Academic Freedom, Private-Sector Focus, and the Process of Innovation

We develop a model that clarifies the respective advantages and disadvantages of academic and private-sector research. Our model assumes full protection of intellectual property rights at all stages of the development process, and hence does not rely on lack of appropriability or spillovers to generate a rationale for academic research. Instead, we focus on control-rights considerations, and argue that the fundamental tradeoff between academia and the private sector is one of creative control versus focus. By serving as a precommitment mechanism that allows scientists to freely pursue their own interests, academia can be indispensable for early-stage research. At the same time, the private sector%u2019s ability to direct scientists towards higher-payoff activities makes it more attractive for later-stage research.

Mergers in emerging markets with network externalities: the case of telecoms

"This paper develops a unifying framework to understand competition issues in network industries. It focuses on the telecom(munication) industry and takes two specific effects of this industry into account. First, the telecom industry is in continuous evolution and alliances affect not only the current market power of the firms but also the evolution of the industry. Second, the production of services in the industry is evolving towards the provision of integrated services in a 'system' that benefits from strong 'network externalities'. The analysis suggests that the antitrust authorities should capture as well such effects as the magnitude of the installed bases, the compatibility of the alliance's system with other systems, the switching costs for customers and application writers, and the 'credibility' of the alliance to offer the service. The developed framework builds on the existing models of networks and combines the different network effects. The relevance of the framework is shown for two important merger cases (WorldCom-MCI and MSG cases), involving respectively an existing market and an emerging one." (author's abstract)"In diesem Beitrag wird ein einheitlicher Bezugsrahmen zur Analyse des Wettbewerbs in Netzwerkindustrien entwickelt. Er zielt auf die Analyse der Telekommunikationsindustrie ab und berücksichtigt dabei spezielle Effekte dieser Industrie. Erstens ist die Telekommunikationsindustrie durch eine stetige Evolution gekennzeichnet und Allianzen zwischen den Unternehmen beeinflussen nicht nur die aktuelle Marktmacht der Unternehmen, sondern auch die Entwicklung der Industrie. Zweitens entwickelt sich die Produktion der Dienste in dieser Industrie immer stärker in Richtung auf das Angebot integrierter Dienste (Systemangebote), die Vorteile aus Netzexternalitäten nutzen. Die Analyse zeigt auch, daß die Wettbewerbsbehörden ebenfalls Merkmale wie die Anzahl der verfügbaren Anschlüsse, die Kompatibilität des Systems der Allianz mit anderen Systemen, die Wechselkosten der Kunden sowie die Glaubwürdigkeit der Dienstleistungsqualität der Allianz berücksichtigen sollten. Der entwickelte Bezugsrahmen stützt sich auf die vorhandenen Netzmodelle und kombiniert die unterschiedlichen Netzeffekte und -merkmale. Die Bedeutung des Ansatzes wird am Beispiel von zwei wichtigen Fusionsfällen aufgezeigt (WorldCom-MCI und MSG), bei denen es sich jeweils um einen existierenden und einen entstehenden Markt handelt." (Autorenreferat

The role of state aid control in improving bank resolution in Europe

The financial crisis exposed EuropeÂ?s inadequacy in developing an effective banking resolution framework that could bring together national authorities and set guidelines for their coordination. The European Commission, through its assessment of state aid cases, managed to avoid single market distortions and mitigate moral hazard. This Policy Contribution explains why in the long-term Europe needs a single resolution authority. The authors Bruegel Senior Research Fellow André Sapir, Mathias Dewatripont, ULB and CEPR; Gregory Nguyen, National Bank of Belgium, and Peter Praet, National Bank of Belgium, show how in the short-term, the European Commission, through its state aid control discipline, can set the foundation for a new crisis resolution architecture. It can act as a substitute to improve coordination among member states and complement a European resolution authority once it is set up.