The economics of social networks : the winner takes it all?

We look at the economics of social networks. Key economic features of these are positive network effects, giving rise to positive feedback effects that may lead to a winner-takes-it-all market. Social networks’ revenues are collected from online advertising; social networks thus constitute two-sided markets. Two-sided markets with ad-financing enhance the winner-takes-it-all effect. However, for many young people, social networks are parts of their image. They may want to be where the right people are, not where all people are. Social networks are virtual communities, places to meet other people. As for offline communities, e.g., nightclubs, it may be important to be a part of a new and trendy community. This may give rise to negative network effects – so-called snob effects; a consumer wants an exclusive or unique product or service. Such a night-club-effect opposes the positive network effects, and may thus limit the winner-takes-it all feature of social networks, suggesting that a ‘Facebook-monopoly’ is not necessarily the most likely scenario

On the choice of royalty rule to cover fixed costs in input joint ventures

In a model where two competing downstream firms establish an input joint venture (JV), we analyze how different royalty rules for covering fixed costs affect channel profits. Under running royalties (regardless of whether based on predicted or actual output), the downstream firms’ perceived marginal costs are above the true marginal costs since fixed costs are incorporated. We find that tougher competition between the JV partners may actually increase channel profit under such a scheme. We also show that running royalties based on predicted output are outperformed by royalties based on actual output, but that lump-sum financing of the JV is preferable if the competitive pressure is weak

Employing endogenous access pricing to enhance incentives for efficient upstream operation

Endogenous access pricing (ENAP) is an alternative to the more traditional form of access pricing that sets the access price to reflect the regulator’s estimate of the supplier’s average cost of providing access. Under ENAP, the access price reflects the supplier’s actual average cost of providing access, which varies with realized industry output. We show that in addition to eliminating the need to estimate industry output accurately and avoiding a divergence between upstream revenues and costs, ENAP can enhance the incentive of a vertically integrated producer to minimize its upstream operating cost

Pricing of on-line advertising: pay-per-view or pay-per-click?

We analyse the choice of pay-per-view (PPV) and price-per-click (PPC) when a web publisher is a price taker in the market for advertising banners, and the number of visits is decreasing in advertising. The main result is that the web publisher should always choose either PPV or PPC. If the click-through rate is exogenous, then the optimal amount of advertising is the same for both pricing metholds and the choice of pricing method is given by the click-through rate. If the click-through rate is endogenous, the amount of advertising will be different under PPV and PPC

Internal pricing in supply chains

A supply chain is two or more parties linked by a flow of goods, information and funds. Since this means that supply chain management concerns environments in which there are multiple decision makers, which may be different firms or different divisions within a single firm, attention has to be focused on methods or mechanisms that improve system efficiencies. The reason for this is that in a supply chain setting, behavior that is locally rational can be inefficient from a global perspective. In this paper we will focus on the use of a negotiated two-part tariff for internal pricing as a means to achieve "channel co-ordination". The two-part internal pricing scheme can be thought of both as a means of handling risk sharing within a supply chain and to avoid the problem of double marginalization

Public Stackelberg leadership in a mixed oligopoly with foreign firms

This is the first paper to consider a mixed oligopoly in which a public Stackelberg leader competes with both domestic and foreign private firms. The welfare maximizing leader is shown to always produce less than under previous Cournot conjectures. Introducing leadership also alters previous public pricing rules resulting in prices that may be either greater than or less than marginal cost depending on the relative number of domestic firms. Furthermore, entry of a foreign firm will increase welfare only when the relative number of domestic firms is small, but that share is shown to be larger than has been indicated without leadership. Unlike previous models, the influence on public profit of a foreign acquisition is ambiguous and is related to the relative number of domestic firms. Finally, the consequences of privatization are shown, for the first time, to depend on the relative number of domestic firms

Endogenous average cost based access pricing

We consider an industry where a downstream competitor requires access to an upstream facility controlled by a vertically integrated and regulated incumbent. The literature on access pricing assumes the access price to be exogenously fixed ex-ante. We analyze an endogenous average cost based access pricing rule, where both firms realize the interdependence among their quantities and the regulated access price. Endogenous access pricing neutralizes the artificial cost advantage enjoyed by the incumbent firm and results in equal or higher consumer surplus. If the entrant is more efficient than the incumbent, then the welfare under endogenous access pricing is also higher

Elasticity based pricing rules in telecommunications : a cautionary note

To recover large common (sunk) costs, telecommunications operators are often recommended to follow an inverse elasticity based pricing; setting the highest markups for the services with the least elastic demand. This is based on the seemingly simple rule for profit maximization proposed in many microeconomics textbooks for marking up marginal cost. This inverse elasticity rule also appears in the well-known Ramsey rule, which has been frequently debated as a regulators tool for curbing monopoly pricing in telecommunications while minimizing deadweight losses. The inverse elasticity rule is all too often described in a way that implies a myopic application, usually with a numerical example with input values for price elasticity of demand and marginal cost thus determining profit maximizing price (e.g. Dobson, Maddala, and Miller, 1995, or Mansfield and Yohe, 2000). This is unfortunate, as management in telecommunications and other industries may adopt the rule at face value. However, if marginal cost and price elasticity depend on price, as is usually the case, a straightforward application of the rule will, in most cases, lead to an overshooting of optimal price; if the initial price were too low, then the prescribed price would be too high, and vice versa. Continued myopic use may even lead to divergence from the profit maximizing price. Only if both price elasticity of demand and marginal cost are constant, which is rarely the case, will the rule return the optimal price