Robin Mason

Comparing economic incentives in peer-to-peer networks

Users who join a peer-to-peer network have, in general, suboptimal incentives to contribute to the network, because of the externalities that exist between them. The result is an inefficient network where the overall levels of contribution are less than would be the case if each peer acted in the interests of the entire network of peers. Incentives provided in the form of prices or contribution rules that require no money transfers can play an important role in reducing these inefficiency effects. The problem in designing such incentive schemes is information: Designing an optimal incentive scheme requires complete knowledge of the types and preferences of the individual peers and their identities. In this paper we discuss the above issues in terms of a simple but representative example by introducing the basic economic concepts and models. We then investigate the practical issue of designing several simpler incentive schemes requiring less information and compare their efficiency loss to the optimal. We show using numerical analysis that these schemes converge to a fixed proportion of the full information optimal as the number of peers in the network becomes large. This result means that it is not necessary to collect large amounts of information, or to undertake complicated calculations, in order to implement the correct incentives in a large peer-to-peer network.

Network externalities and the Coase conjecture

Abstract This paper addresses two general questions. First, what is the effect of market structure on the development of a network in a dynamic model with rational expectations? Secondly, is the intuition that network externalities are ‘economies of scale on the demand side’ correct? These questions are examined in a model of durable good production in the presence of network externalities. Two results are presented. First, the Coase conjecture fails in its strongest sense when network benefits are increasing in the current network size. Secondly, a committed monopolist may be socially preferable to a time consistent producer when network externalities are sufficiently large. The analysis indicates an analogy between network externalities and learning-by-doing.

Simple competitive internet pricing

Abstract It is widely recognised that pricing is required to control congestion on the Internet. One lesson that has emerged from many proposals is that any price system should be simple and robust to competition. This is highlighted in the question currently under debate in the market for Internet services: should usage prices should be employed at all? In a duopoly model with overall positive network effects, it is shown that flat rate pricing can occur in equilibrium, even when the costs of measuring variable demand are very small.

Market structure in congestible markets

This paper analyses market structure of industries that are subject to both positive and negative network effects. The size of a firm determines the quality of its product: when network effects are positive, a larger firm is of higher quality; when the effects are negative, a larger firms product is of lower quality. Consumers have heterogeneous preferences towards quality (firm size), and firms compete in prices. Equilibria are characterised: for example, in any asymmetric equilibrium, it must be that congestion is not too severe. One consequence of this feature is that an increase in the number of firms in the industry can raise individual firms’ profits. Two factors can bound the number of firms in a free-entry equilibrium without fixed costs: expectations, and the ‘finiteness’ property (Shaked and Sutton, Review of Economic Studies 49 (1982) 3–13, Econometrica 51(5) (1983) 1469–1483) of price competition.

The costs of uncoordinated regulation

Patents encourage firms to undertake research and development by protecting innovator revenues from competition. Controls on pollution of the environment are intended to close the gap between the private and social costs of natural resource use. This paper examines the incentives that are created by the interaction of these two separate pieces of regulation. A model is developed that shows how an incumbent, patent-holding firm can take advantage of environmental regulation to exclude rivals from her market.

Multiproduct Competition between Congestible Networks

This paper analyses competition between firms who sell multiple products in the presence of negative externalities. The model involves two networks who each may offer several service classes. Service classes are generated by forming sub-networks differentiated by their congestion levels. The level of congestion on a sub-network is determined by its capacity and the number of users, i.e., quality of demand-dependent. This paper shows that networks will choose to offer only one service class, and thus not to form distinct sub-networks, in equilibrium. In addition to contributing to the theory of multiproduct competition, the paper addresses applied problems. For example, the results suggest that current proposals to implement pricing on the Internet will not be viable under competition.

The effects of uncertainty on optimal consumption

When marginal utility is convex and there is pure labour income uncertainty, certain results are well-known. Asset return uncertainty is often assumed to have qualitatively similar effects; see e.g. Skinner (1988). We show that this assumption is not correct. Asset return uncertainty gives rise to an additional term in the Euler equation, which by introducing a role for current cash-in-hand, may work in the opposite direction to the precautionary motive, leading to ambiguity in the slope of the expected consumption time profile. We present a linearised version of the Euler equation, and an associated closed form solution, in order to provide intuition for these results. Numerical analysis indicates that the approximation is reasonable for empirically plausible estimates of the variances of the underlying disturbances.

A Framework for Analyzing the Economics of a Market for Grid Services

This paper provides a single broad model for the analysis of a range of issues underlying a market for Grid services. The demand and the supply sides of such a market are being treated separately and the relation between the two sides is being studied. We provide numerical results in order to derive conclusions about the viability of a market for Grid services. Underlying our model are parameters such as the cost technologies, the random processes driving demand and supply and the size of the market. We study the effect of the models parameters, such as risk aversion or the durability of resources, on the systems behavior, eg. on the clearing price or volume of trade.

The Impact of International Environmental Agreements: The Case of the Montreal Protocol

There has been a recent economic literature arguing that international environmental agreements (IEAs) can have no real effect, on account of their voluntary and self-enforcing nature. This literature concludes that the terms of IEAs are the codification of the noncooperative equilibrium, and recent empirical work has supported this conclusion in the context of the Montreal Protocol. This paper reaches the opposite conclusion, by means of the comparison of the CFC emissions implicit within the cooperative and noncooperative management paths. The cooperative path is implicit within the terms of the Montreal Protocol. The noncooperative path is implicit in countries behaviour during the period of unilateral management of CFC emissions. This study estimates the relationship between countries propensities to produce CFCs and income per capita over the period 1976-1988 (prior to the entry into force of the Montreal Protocol). It then extrapolates this path of unilateral management beyond 1988, and compares it to the obligations adopted under the cooperative regime. This comparison of the projected noncooperative path with the obligations adopted under the Montreal Protocol allows a qualitative test of theories on the economic foundations of self-enforcing IEAs. We find that, in the absence of the Protocol, CFC production (and hence emissions) would have increased by a factor of three over the next fifty years. This study also supplements existing environmental Kuznets curve analyses by providing estimates for the unilateral management for a global externality. In this manner we are able to assess the distributive impacts of the Protocol, in addition to its effectiveness. Using dynamic estimation methods on a panel of around 30 countries over 13 years, the turning point in the relationship between CFC production and income is found to lie around (1986) US

Uncertainty, co-ordination and path dependence

16,000. This implies that developing countries bear the greatest costs in the implementation of the Montreal Protocol.