Christiaan Hogendorn

PLATFORM COMPETITION WITH ‘MUST-HAVE’ COMPONENTS*

In platform-component systems with indirect network effects, some ‘must-have’ components are so popular with consumers that they create large, discrete indirect network effects when they become available on a platform. For example, ESPN is a must-have component of cable TV platforms. This paper examines how platform market structures determine exclusive versus non-exclusive contracts between platforms and components. It shows that a component provider is more likely to sign exclusive contracts with a single platform if its popularity is high, the platform market share difference is large, and cross-platform indirect network effects are low.

Aggregators, search and the economics of new media institutions

Proliferation of content on the internet offers consumers access to more sources than had been possible with traditional media. Disaggregated content also increases the relevance of targeting for advertisers. But at the same time, search costs increase the role of intermediaries in media consumption in ways that are poorly understood. This paper studies the effects of search technology and aggregators in digital media markets. A simple model shows how these institutions can alter both market participation and the number of sites visited, which in turn affects equilibrium prices and profits in the advertising market. When consumers have a taste for variety and advertisers are horizontally differentiated, intermediaries can alter advertising strategies in ways that reduce the value of targeting. The results offer both positive and normative predictions about the value of new media institutions for consumers, advertisers and media outlets.

Capital Mobility in Historical Perspective

Abstract The level of international capital mobility has changed considerably over the last century and a half. Using the Feldstein-Horioka savings retention measure, this study examines capital mobility in every decade from 1865 to 1992. The results indicate high capital mobility in the classical gold standard period and much lower mobility during the Bretton Woods era. In recent years capital mobility has increased again. Capital flows are related to capital-output ratios, and there are indications that capital does move to countries where it is most productive.

Spillovers and Network Neutrality

Proposals for network neutrality are usually justified at least in part based on positive spillovers and externalities related to an “open” Internet. Almost everyone would agree that the Internet generates a great many positive benefits throughout the economy, but there is much less agreement as to whether these benefits are “spillovers” or “externalities” in an economic sense. The answer to that question has significant implications for whether regulation is justified and how it should be designed. This essay examines three sources of benefits from the Internet - general purpose technology, network effects, and innovation - and evaluates whether they could in fact be reduced by private, potentially non-neutral behavior by ISPs.

Local News Online: Aggregators, Geo-Targeting and the Market for Local News

We examine how placement of geo-targeted local news links on Google News affects online local news consumption. Using a sample of news visits by 43087 US households before and after a Google News design change, we find that aggregation increases both the level and the share of local news consumed online. Magnitudes are small: local news visits increase by less than 1 percent and the likelihood of a local news visit increases by 4-6 percent. The redesign also increases the local share of visits to outlets, indicating that aggregation alters not only the size but also the composition of the local media audience.

Collusive Long-Run Investments Under Transmission Price-Caps

In the short run, constraints in the electricity transmission system may give market power to generators. This paper examines whether the constraints themselves are a long-run equilibrium outcome in a competitive environment. We show that independent transmission companies and generators can tacitly collude to raise prices to consumers and divide the resulting profits. We also show that price cap regulation does not prevent this behavior and may in fact contribute to it. The mechanism for collusion is that generators locate their plants so that a capacity-constrained transmission line lies between them and their consumer market. We show that this constraint-based collusion can be sustained in a static game without any punishment strategies.

Tacit Collusion in Capacity Investment: The Role of Capacity Exchanges

In many capacity-intensive industries (e.g. electricity, bandwidth), exchanges allow firms, including competitors, to buy and sell wholesale capacity before selling on the retail market. Capacity exchanges allow firms to smooth demand shocks, but do they also facilitate tacit collusion to limit capacity investment? This paper models investment and exchange in a one-shot game and in a repeated game with tacit collusion. It finds that the presence of the exchange does not reduce total capacity investment, and thus does not raise consumer prices. In fact, the exchange may make it more difficult to sustain tacit collusion.

Broadband Internet: Open Access and Content Competition

Broadband “open access” regulation mandates openness of conduits (e.g. upgraded cable television) to service providers (e.g. America Online), but policy discussion often suggests that the ultimate goal is openness to advanced content (streaming video, interactive e-commerce, etc.). We define two forms of regulation, open access and common carriage, and discuss when they are equivalent. We argue that they are quite different in local access broadband. We develop a systems model with free entry and competition in all three industry segments (conduits, service providers, and content) and examine how open access regulation affects the number of firms in each. We confirm the view that an open access requirement can reduce entry of physical conduits, and more surprising we also describe conditions under which it can reduce the amount of content available to consumers.

Platform Contracting and Exclusivity

Platforms care about the quality of components they host. For example, a computer operating system is more popular - and thus more profitable - when the software is high quality. Some platforms offer special arrangements to high-quality firms - for example, Apple promotes high-quality Macintosh software on the Apple website. Others shut out low-quality firms completely. Nintendo has established a reputation for screening out low quality games from their game console. Finally, some platforms require exclusive contracts, whereby a component cannot be made available on any other platform, many TV sports programming contracts are designed this way. We study the contract design options of a platform owner offering a screening contract to a component developer who should be incentivized to deliver a particular quality level. When dealing both with adverse selection (component quality types are not known to the platform ex ante) and moral hazard (efforts to improve the component or offer customer service are not observable to the platform), the platform will use additional allocative distortion compared to the standard screening contract. Of particular interest is our finding that under exclusivity, when high-quality components require a higher participation rent, there is less allocative distortion, permitting a new interpretation of countervailing incentives in a platform-contracting environment.