Toker Doganoglu

Estimating network effects in mobile telephony in Germany

In this paper we analyze the demand for mobile telecommunication services in Germany in the period from January 1998 to June 2003. During this time, the subscriber base grew exponentially by about 700% while prices declined only moderately by about 41%. We believe that prices alone cannot account for such rapid diffusion and network effects have influenced the evolution of the industry. We put this view to the test by using publicly available data on subscriptions, price indices and churn rates. Using churn rates gave us approximate sales levels which enabled us to use standard methods to investigate the effect of network size on demands. Our estimates of a system of demand functions show that network effects played a significant role in the diffusion of mobile services in Germany.

Maximum likelihood estimation of stable Paretian models

Stable Paretian distributions have attractive properties for empirical modeling in finance, because they include the normal distribution as a special case but can also allow for heavier tails and skewness. A major reason for the limited use of stable distributions in applied work is due to the facts that there are, in general, no closed-form expressions for its probability density function and that numerical approximations are nontrivial and computationally demanding. Therefore, Maximum Likelihood (ML) estimation of stable Paretian models is rather difficult and time consuming. Here, we study the problem of ML estimation using fast Fourier transforms to approximate the stable density functions. The performance of the ML estimation approach is investigated in a Monte Carlo study and compared to that of a widely used quantile estimator. Extensions to more general distributional models characterized by time-varying location and scale are discussed.

Computing the probability density function of the stable Paretian distribution

The practical implementation of a stable Paretian model is a nontrivial task, because-with the exception of a few special cases-its probability density function cannot be expressed analytically. Here, we present an algorithm for calculating the probability density function of the asymmetric stable Paretian distribution. Due to the use of the Fast Fourier Transform, the algorithm is computationally efficient, easily implemented, and of similar accuracy as existing algorithms.

Dynamic Duopoly Competition with Switching Costs and Network Externalities

This paper analyzes competition in a two-period differentiated-products duopoly in the presence of both switching costs and network effects. We show that they have opposite implications on the demand side, specially in the first period. Switching costs reduce demand elasticities and network effects increase them. We derive the symmetric subgame perfect equilibrium outcome of the two-period competition. An increase in marginal network benefits implies lower prices in both periods while the effect of an increase switching costs is ambiguous. We show that the first-period equilibrium prices are U-shaped in switching costs and decrease when switching costs increase around zero. Furthermore, we show that prices in a market with network effects and switching costs may be lower than those in a market without these features, with only switching costs and with only network effects.

Network Competition and Access Charge Rules

This paper presents a model of two competing local telecommunications networks which are mandated to interconnect. After negotiating the access charges, the companies engage in price competition. Given the prices, each consumer selects a network and determines the consumption of phone calls. Using a discrete/continuous consumer choice model, it is shown that a pure strategy equilibrium exists quite generally and satisfies desirable properties. This equilibrium can be implemented by a simple rule that sets the access charges at a common discount from the retail prices. It requires no information and the discount factor is chosen by the companies through negotiations. Finally, if the networks are highly substitute, the retail prices obtained by imposing this rule will approximate the efficient prices.

Dynamic Price Competition with Consumption Externalities

The dynamic price competition in a horizontally differentiated duopoly when consumers value previous market shares is analyzed. The conditions for the existence of stable Markov-Perfect Equilibrium (MPE) in linear strategies are established. When they exist, the optimal pricing policies suggest that a firm with a higher previous market share charges a higher price, all else equal. It is possible to observe pricing below cost for some periods. In the steady state, the MPE leads to a more competitive outcome (lower prices) than the case where there are no consumption externalities. The model can produce outcomes where the steady state is reached very slowly which provides an alternative explanation for slow emergence of competition when entrants face an established incumbent: It may be due to persistence in consumer tastes.

Licensing of a Drastic Innovation with Product Differentiation

We analyze the licensing of a drastic innovation when products are differentiated due to consumer and/or product heterogeneity. We show that an industry insider prefers to divest its production arm and license the new technology as an industry outsider, in which case it can replicate multiproduct monopoly profit. We derive the optimal contracts and the optimal number of licenses by assuming a logit demand system. Optimal number of licenses, quite strikingly, increases when the technology has a higher relative value than a commercialized alternative. This result stands in sharp contrast with the literature on the licensing of a homogenous good.

Economics of Collective Refusals to Supply

This paper examines situations where vertically integrated firms refuse to supply an input to an independent competitor in the downstream market. The treatment of such cases by competition or regulatory authorities is often based on the assumption that such outcomes can only arise if there is collusion in the upstream markets. We argue that this is not always the case. In particular, we argue that proper antitrust or regulatory assessment of such cases must take into account the nature of competition, whether sales contracts are observable, the degree of contractual flexibility that is permitted, the substitutability of downstream products, and even the number of potential competitors in the downstream market.

Product Variety and Competitive Pricing in Consumer Goods Markets

Daniel Klapper is Professor of Marketing at Johann Wolfgang Goethe-Universität Frankfurt, Mertonstr. 17, D-60054 Frankfurt am Main, Germany, Phone: +49-69-798-23161, Fax: +49-69-798-23167, E-Mail: dklapper@wiwi.unifrankfurt.de Toker Doganoglu is Assistant Professor at Ludwig-Maximilians-Universität München, Seminar für Ökonometrie, Finanzökonometrie und Statistik, Institut für Statistik, Akademiestr. 1/I, D-80799 München, Germany, Phone: +49-89-2180-3224, Fax: +49-89-2180-5044, E-Mail: toker@athene.stat.unimuenchen.de Product Variety and Competitive Pricing in Consumer Goods Markets

General Access Payment Mechanisms

Despite the voluminous literature documenting their problems, per unit access pricing mechanisms are the most common ones used in practice. Interestingly, neither legal documents nor theoretical work on access payments provide any justifications for restricting access payments to per-unit charges. In this paper, we examine the properties of general one-way access payment mechanisms where payments from the entrants to the incumbent are expressed as functions of retail prices. We find that by imposing a linear access pricing mechanism the regulator can implement any pair of retail prices, including the first best. We also show that a per-unit access mechanism, including one which is cost-based, is incapable of implementing the first-best outcome. Moreover, we obtain a partial welfare ordering of payment mechanisms in that any linear access payment mechanism that depends negatively on the incumbent’s price and positively on the entrant’s price generates desirable outcomes with higher consumer welfare than payment mechanisms where parameters have the opposite signs.