25 research outputs found
Does a Platform Monopolist Want Competition?
We consider a software vendor first selling a monopoly platform and then an application running on this platform. He may face competition by an entrant in the applications market. The platform monopolist can benefit from competition for three reasons. First, his profits from the platform increase. Second, competition serves as a credible commitment to lower prices for applications. Third, higher expected product diversity may lead to higher demand for his application. Results carry over to non-software platforms and, partially, to upstream and downstream firms. The model also explains why Microsoft Office is priced significantly higher than Microsoft's operating system.Platforms; entry; complementary goods; price commitment; product diversity; Microsoft; vertical integration; two-sided markets
On Platforms, Incomplete Contracts, and Open Source Software
We consider a firm A initially owning a software platform (e.g. operating system) and an application for this platform. The specific knowledge of another firm B is needed to make the platform successful by creating a further application. When B's application is completed, A has incentives to expropriate the rents. Netscape claimed e.g. that this was the case with its browser running on MS Windows. We will argue that open sourcing or standardizing the platform is a warranty for B against expropriation of rents. The different pieces of software are considered as assets in the sense of the property rights literature (see Hart and Moore (Journal of Political Economy, 1990)). Two cases of joint ownership are considered beyond the standard cases of integration and non-integration: platform standardization (both parties can veto changes) and open source (no veto rights). In line with the literature, the more important a party's specific investments the more rights it should have. In contrast to Hart and Moore, however, joint ownership can be optimal in our setting. Open source is optimal if investments in the applications are more important than in the platform. The results are driven by the fact that in our model firms invest in physical (and not in human) capital and that there is non-rivalry in consumption for software.Platforms; open source; standardization; incomplete contracts; property rights; joint ownership
Does a Platform Owning Monopolist Want Competition?
We consider a software vendor selling both a monopoly platform (e.g. operating system) and an application that runs on this platform. He may face competition by an entrant in the applications market. Consumers are heterogeneous in their preferences for both the platform and the applications. They first buy the platform and then the applications. Their utility over the horizontally differentiated applications is known only after they bought the platform. In equilibrium the platform seller can be better off with a competitor in the applications market for three reasons. First, the platform vendor makes more profits with his platform. Second, the competitor's entry serves as a credible commitment to lower prices for applications. Third, higher ex ante expectations of product diversity lead to a higher demand for his application. Competition may be profit enhancing even if the first two effects are absent, i.e. the product diversity effect can be sufficient. The model also gives an answer to the much debated question why Microsoft prices MS Office significantly higher than its operating system.Two-sided markets; platforms; entry; complementary goods; price commitment; product diversity; Microsoft
Fee-Setting Mechanisms: On Optimal Pricing by Intermediaries and Indirect Taxation
Mechanisms according to which private intermediaries or governments charge
transaction fees or indirect taxes are prevalent in practice. We consider a setup with
multiple buyers and sellers and two-sided independent private information about
valuations. We show that any weighted average of revenue and social welfare can be
maximized through appropriately chosen transaction fees and that in increasingly
thin markets such optimal fees converge to linear fees. Moreover, fees decrease with
competition (or the weight on welfare) and the elasticity of supply but decrease
with the elasticity of demand. Our theoretical predictions fit empirical observations
in several industries with intermediaries
Breaking Up a Research Consortium
Inter-firm R&D collaborations through contractual arrangements have become increasingly
popular, but in many cases they are broken up without any joint discovery.
We provide a rationale for the breakup date in R&D collaboration agreements. More
specifically, we consider a research consortium initiated by a firm A with a firm B. B has
private information about whether it is committed to the project or a free-rider. We
show that under fairly general conditions, a breakup date in the contract is a (secondbest)
optimal screening device for firm A to screen out free-riders. With the additional
constraint of renegotiation proofness, A can only partially screen out free-riders: entry
by some free-riders makes sure that A does not have an incentive to renegotiate the
contract ex post. We also propose empirical strategies for identifying the three likely
causes of a breakup date: adverse selection, moral hazard, and project non-viability
Assessing the Performance of Simple Contracts Empirically: The Case of Percentage Fees
This paper estimates the cost of using simple percentage fees rather than
the broker optimal Bayesian mechanism, using data for real estate transactions
in Boston in the mid-1990s. This counterfactual analysis shows that interme-
diaries using the best percentage fee mechanisms with fees ranging from 5.4%
to 7.4% achieve 85% or more of the maximum profit. With the empirically
observed 6% fees intermediaries achieve at least 83% of the maximum profit
and with an optimally structured linear fee, they achieve 98% or more of the
maximum profit
For-Profit Search Platforms
We consider optimal pricing by a profit-maximizing platform running a dynamic search
and matching market. Buyers and sellers enter in cohorts over time, meet and bargain
under private information. The optimal centralized mechanism, which involves posting a
bid-ask spread, can be decentralized through participation fees charged by the intermediary
to both sides. The sum of buyers’ and sellers’ fees equals the sum of inverse hazard rates
of the marginal types and their ratio equals the ratio of buyers’ and sellers’ bargaining
weights. We also show that a monopolistic intermediary in a search market may be welfare
enhancing
When is Seller Price Setting with Linear Fees Optimal for Intermediaries?
Mechanisms where sellers set the price and are charged a linear commission fee are widely used by real world intermediaries, e.g. by real estate brokers. Empiri- cally these commission fees exhibit very little variance, both across heterogeneous regional markets and over time. So far, there is no theoretical explanation why such seller price setting mechanisms are used and why the linear fees vary so little. In this paper, we first show that in a Bayesian setup seller price setting with linear fees is revenue equivalent to the intermediary optimal direct mechanism derived by Myerson and Satterthwaite (1983) if and only if the seller’s cost is drawn from a generalized power distribution. Whenever such a mechanism is optimal, the fee structure is independent of the distribution from which the buyer’s valuation is drawn. Second, we derive the intermediary optimal direct mechanism when there are many buyers and possibly many sellers and we show that with one seller any standard auction with linear fees and reserve price setting by the seller (which are used e.g. by eBay) implements this mechanism if the seller’s cost is drawn from a power distribution and if buyers’ valuations are identically distributed. Third, we show that when the number of buyers approaches infinity while there is still one seller, seller price setting and price setting by the intermediary are equivalent, intermediary optimal mechanisms.Brokers; linear commission fees; optimal indirect mechanisms
When is Seller Price Setting with Linear Fees Optimal for Intermediaries?
Mechanisms where sellers set the price and are charged a linear commission fee are widely used by real world intermediaries, e.g. by real estate brokers. Empirically these commission fees exhibit very little variance, both across heterogeneous regional markets and over time. So far, there is no theoretical explanation why such seller price setting mechanisms are used and why the linear fees vary so little. In this paper, we first show that in a Bayesian setup seller price setting with linear fees is revenue equivalent to the intermediary optimal direct mechanism derived by Myerson and Satterthwaite (1983) if and only if the seller's cost is drawn from a generalized power distribution. Whenever such a mechanism is optimal, the fee structure is independent of the distribution from which the buyer's valuation is drawn. Second, we derive the intermediary optimal direct mechanism when there are many buyers and possibly many sellers and we show that with one seller any standard auction with linear fees and reserve price setting by the seller (which are used e.g. by eBay) implements this mechanism if the seller's cost is drawn from a power distribution and if buyers' valuations are identically distributed. Third, we show that when the number of buyers approaches infinity while there is still one seller, seller price setting and price setting by the intermediary are equivalent, intermediary optimal mechanisms.Brokers; linear commission fees; optimal indirect mechanisms
Does a Platform Monopolist Want Competition?
We consider a software vendor first selling a monopoly platform and then an application
running on this platform. He may face competition by an entrant in the applications market. The platform monopolist can benefit from competition for three reasons. First, his profits from the platform increase. Second, competition serves as a credible commitment to lower prices for applications. Third, higher expected product diversity may lead to higher demand for his application. Results carry over to non-software platforms and, partially, to upstream and downstream firms. The model also explains why Microsoft Office is priced significantly higher than Microsoft’s operating system