Kenneth S. Corts

Conduct parameters and the measurement of market power

This paper examines a simple version of the conduct parameter method widely used in empirical industrial organization and argues that the conduct parameter fails to measure market power accurately. It is shown analytically and with simulations that in a dynamic oligopoly model this mismeasurement can be quite severe.

Software Exclusivity and the Scope of Indirect Network Effects in the U.S. Home Video Game Market

This paper investigates the scope of indirect network effects in the home video game industry. We argue that the increasing prevalence of non-exclusive software gives rise to indirect network effects that exist between users of competing and incompatible hardware platforms. This is because software non-exclusivity, like hardware compatibility, allows a software firm to sell to a market broader than a single platforms installed base. We look for evidence of market-wide network effects by estimating a model of hardware demand and software supply. Our software supply equation allows the supply of games for a particular platform to depend not only on the installed base of that platform, but also on the installed base of competing platforms. Our results indicate the presence of both a platform-specific network effect and--in recent years--a cross-platform (or generation-wide) network effect. Our finding that the scope of indirect network effects in this industry has widened suggests one reason that this market, which is often cited as a canonical example of one with strong indirect network effects, is no longer dominated by a single platform.

Regulation of a Multi-Product Monopolist: Effects on Pricing and Bundling

This paper studies the effects on a multi-product monopolists pricing and bundling decisions of a form of regulation in which a price-cap is imposed on only the basic level of service. Conditions are given under which the screening problem faced by the multi-product monopolist can be adequately represented in a one-dimensional screening model, and it is shown that this requires strong assumptions on preferences. In both a one-dimensional and a general multi-product screening model basic service price-caps may result in higher prices for some consumers even while lowering prices for other consumers. Socially suboptimal unbundling may be induced by such regulation in the general multi-product model. Copyright 1995 by Blackwell Publishing Ltd.

The Effects of Platform Most-Favored-Nation Clauses on Competition and Entry

In the context of sellers who sell their products through intermediary platforms, a platform most-favored-nation (PMFN) clause is a contractual restriction requiring that a particular seller will not sell at a lower price through a platform other than the one with which it has the PMFN agreement. Contractual restrictions observed in markets for e-books and travel services, among other settings, can be viewed as examples of this phenomenon. We show that PMFN clauses typically raise platform fees and retail prices and curtail entry or skew positioning decisions by potential entrants pursuing low-end business models.

Prohibitions on False and Unsubstantiated Claims: Inducing the Acquisition and Revelation of Information through Competition Policy

This paper explores the differences between policies prohibiting false claims about product quality and policies requiring adequate prior testing to substantiate specific claims of quality. It develops a model in which firms have private information about their type—represented by their probability of having a high-quality product—and can acquire additional private information about their product quality through costly testing and learning. Penalties for false claims and for unsubstantiated claims create an opportunity for firms to credibly reveal their information and for signaling to emerge in equilibrium. I show that the two kinds of penalties affect the possibility of signaling in different ways and that the mandatory substantiation requirement in many circumstances improves buyer information and social welfare beyond what is achieved by a ban on false claims alone.

Finite Optimal Penalties for False Advertising

I consider a setting in which firms have unverifiable private information about their type, which corresponds to their probable product quality; firms can expend a learning cost in order to observe their quality; and the regulator can enforce false advertising penalties contingent only on verifiable realized quality. I show that it may be socially optimal for high type firms to signal their type through ‘speculative claims,’ rather than to learn and signal their quality. This implies that socially optimal false advertising penalties are finite, in contrast to the literatures common assumption of arbitrarily high false advertising penalties, and that the regulator optimally tolerates the existence of some false claims in equilibrium.

How the Source of the Entrant's Advantage Limits Entry‐Deterring Tying

I revisit a simple model of entry-deterring tyingexample 1 from Whinstons (1990) seminal paperbut allow the potential entrant to have either a cost advantage or a willingness-to-pay (WTP) advantage relative to the incumbent. I show that, compared to the usual case in which the potential entrant is cost-advantaged, tying is less effective against an entrant with a WTP advantage because an entrant with a large WTP advantage may be able to induce the buyer to buy both the tied bundle and the entrants product. I also show that tying but failing to deter entry can be less costly when facing an entrant with a WTP advantage than when facing an entrant with a cost advantage. For a firm facing uncertainty about, for example, the entrants entry costs, this makes tying a more attractive entry deterrence strategy against a WTP-advantaged entrant. These results shed light on the important policy question of which markets are most likely to be susceptible to entry-deterring tying.