Michael L. Katz

Technology Adoption in the Presence of Network Externalities

We analyze technology adoption in industries where network externalities are significant. The pattern of adoption depends on whether technologies are sponsored. A sponsor is an entity that has property rights to the technology and hence is willing to make investments to promote it. Key findings include the following: (1) compatibility tends to be undersupplied by the market, but excessive standardization can occur; (2) in the absence of sponsors, the technology superior today has a strategic advantage and is likely to dominate the market; (3) when one of two rival technologies is sponsored, that technology has a strategic advantage and may be adopted even if it is inferior; (4) when two competing technologies both are sponsored, the technology that will be superior tomorrow has a strategic advantage.

An analysis of cooperative research and development

I analyze the effects of cooperative research, whereby member firms agree to share the costs and fruits of a research project before they undertake it. In this model industrywide agreements tend to have socially beneficial effects when the degree of product market competition is low, when there are R&D spillovers in the absence of cooperation, when a high degree of sharing is technologically feasible, and when the agreement concerns basic research rather than development activities. I show that a royalty-free cross-licensing agreement among any number of firms lowers the equilibrium level of innovation even though it increases the efficiency of R&D through sharing.

On the Licensing of Innovations

We study a three-stage, asymmetric duopoly game of RD (2) fixed-fee licensing of the innovation; and (3) sale of the final product. We find that major innovations will not be licensed, but that equally efficient firms will tend to license minor innovations. For some innovations, licensing is both privately and socially undesirable. If at least one of the two producers would refuse to license (were it to acquire the innovation), then licensing will not occur; an excluding firm will obtain the innovation. The possibility of licensing may decrease the returns to innovation if the licensee appropriates most of the licensing gains to trade.

An Analysis of Out-of-Wedlock Childbearing in the United States

This paper relates the erosion of the custom of shotgun marriage to the legalization of abortion and the increased availability of contraception to unmarried women in the United States. The decline in shotgun marriage accounts for a significant fraction of the increase in out-of-wedlock first births. Several models illustrate the analogy between women who do not adopt either birth control or abortion and the hand-loom weavers, both victims of changing technology. Mechanisms causing female immiseration are modeled and historically described. This technology-shock hypothesis is an alternative to welfare and job-shortage theories of the feminization of poverty.

Sender or receiver: who should pay to exchange an electronic message?

We examine the pricing implications of call externalities, the benefits enjoyed by the recipient of a message sent by another user. We show that, with or without a network-profitability constraint, efficient pricing requires consideration of demands, as well as costs. We present conditions under which equal charges for sending and receiving calls maximize welfare and profits. We also present conditions under which the receiving partys subsidizing the sender maximizes welfare and profits. Last, we show that menus of pricing options can increase welfare and profits. None of these findings holds in the absence of call externalities.

An Economist's Guide to U.S. v Microsoft

We analyze the central economic issues raised by U.S. v Microsoft. Network effects and economies of scale in applications programs created a barrier to entry for new operating system competitors, which the combination of Netscape Navigator and the Java programming language potentially could have lowered. Microsoft took actions to eliminate this threat to its operating system monopoly, and some of Microsofts conduct very likely harmed consumers. While we recognize the risks of the governments proposed structural remedy of splitting Microsoft in two, we are pessimistic that a limited conduct remedy would be effective in this case.

ANTITRUST IN SOFTWARE MARKETS

The computer and software sector is a tremendously important and visible part of the economy. It is also a sector in which there have long been concerns about monopolization. In the past, these concerns centered on monopolization by IBM. Today, the concerns are with Microsoft, but in many ways they are the same. IBM was accused of attempting to sabotage industry standards in Fortran; Microsoft is accused of sabotaging JAVA. IBM was accused of predatory product pre-announcements; Microsoft has been accused of employing “vaporware” — the tactic of announcing products before they are ready in order to preempt the market — to undercut its competitors. IBM was accused of bundling functionality into its CPUs to reduce the value of peripheral equipment; Microsoft is battling government lawyers over the bundling of Internet Explorer with Windows 95. IBM was accused of manipulating interfaces and refusing to reveal them to competitors; Microsoft is accused of refusing to reveal interfaces to competitors. Both companies entered into consent decrees with the Department of Justice to settle antitrust charges.

Observable Contracts as Commitments: Interdependent Contracts and Moral Hazard

A large literature examines the use of observable and unrenegotiable agency contracts as commitments. These analyses generally impose an ad hoc restriction that contracts cannot be contingent on one another. I relax this restriction and obtain a folk theorem. Unlike earlier folk theorems in this area, the present result applies to agency relationships that have hidden-action problems. Using an example, I also demonstrate that there are settings in which interdependent contracts support a strictly larger set of equilibrium outcomes than do independent contracts. The result highlights the critical need for careful thought about restrictions placed on the set of feasible contracts.

Corporate Diversification and Agency

Firms undertake a variety of actions to reduce risk through diversification, including entering diverse lines of business, taking on project partners, and maintaining portfolios of risky projects such as R&D or natural resource exploration. By a well-known argument, securities holders do not directly benefit from risk-reducing corporate diversification when they can replicate this diversification on their own. Moreover, shareholders should be risk neutral with respect to the unsystematic risk that is associated with many research projects. Some have argued that corporate risk reduction may be of value, or can otherwise be explained by, the agency relationship between securities holders and managers. We argue that the value of diversification strategies in an agency relationship derives not from its effects on risk, but rather from its effects on the principals information about the agents actions. We demonstrate by example that diversification activities may increase or decrease the principals information, depending on the particular structure of the activity

Competition or Predation? Schumpeterian Rivalry in Network Markets

We explore the logic of predation and rules designed to prevent it in markets subject to network effects. Although, as many have informally argued, predatory behavior is plausibly more likely to succeed in such markets, we find that it is particularly hard to intervene in network markets in ways that improve welfare. We find that imposition of the leading proposals for rules against predatory pricing may lower or raise consumer welfare, depending on conditions that may be difficult to identify in practice.