Mobile termination, network externalities, and consumer expectations

We re-examine the literature on mobile termination in the presence of network externalities. Externalities arise when firms discriminate between on- and off-net calls or when subscription demand is elastic. This literature predicts that profit decreases and consumer surplus increases in termination charge in a neighborhood of termination cost. This creates a puzzle since in reality we see regulators worldwide pushing termination rates down while being opposed by network operators. We show that this puzzle is resolved when consumers' expectations are assumed passive but required to be fulfilled in equilibrium (as defined by Katz and Shapiro, AER 1985), instead of being rationally responsive to non-equilibrium prices, as assumed until now.

Knowledge, networks of cities and growth in regional urban systems

The objective of this paper is to measure the impact of different kinds of knowledge and external economies on urban growth in an intraregional context. The main hypothesis is that knowledge leads to growth, and that this knowledge is related to the existence of agglomeration and network externalities in cities. We develop a three-tage methodology: first, we measure the amount and growth of knowledge in cities using the OCDE (2003) classification and employment data; second, we identify the spatial structure of the area of analysis (networks of cities); third, we combine the Glaeser - Henderson - De Lucio models with spatial econometric specifications in order to contrast the existence of spatially static (agglomeration) and spatially dynamic (network) external economies in an urban growth model. Results suggest that higher growth rates are associated to higher levels of technology and knowledge. The growth of the different kinds of knowledge is related to local and spatial factors (agglomeration and network externalities) and each knowledge intensity shows a particular response to these factors. These results have implications for policy design, since we can forecast and intervene on local knowledge development paths.

Mobile termination and mobile penetration

In this paper, we study how access pricing affects network competition when subscription demand is elastic and each network uses non-linear prices and can apply termination-based price discrimination. In the case of a fixed per minute termination charge, we find that a reduction of the termination charge below cost has two opposing effects: it softens competition but helps to internalize network externalities. The former reduces mobile penetration while the latter boosts it. We find that firms always prefer termination charge below cost for either motive while the regulator prefers termination below cost only when this boosts penetration. Next, we consider the retail benchmarking approach (Jeon and Hurkens, 2008) that determines termination charges as a function of retail prices and show that this approach allows the regulator to increase penetration without distorting call volumes.

Mobile termination and mobile penetration

In this paper, we study how access pricing affects network competition when subscription demand is elastic and each network uses non-linear prices and can applytermination-based price discrimination. In the case of a fixed per minute terminationcharge, we find that a reduction of the termination charge below cost has two opposing effects: it softens competition but helps to internalize network externalities. Theformer reduces mobile penetration while the latter boosts it. We find that firms always prefer termination charge below cost for either motive while the regulator preferstermination below cost only when this boosts penetration.Next, we consider the retail benchmarking approach (Jeon and Hurkens, 2008)that determines termination charges as a function of retail prices and show that thisapproach allows the regulator to increase penetration without distorting call volumes.

The economic value of reciprocal bilingualism

Some bilingual societies exhibit a distribution of language skills that can- not be explained by economic theories that portray languages as pure commu- nication devices. Such distribution of skills are typically the result of public policies that promote bilingualism among members of both speech commu- nities (reciprocal bilingualism). In this paper I argue that these policies are likely to increase social welfare by diminishing economic and social segmenta- tion between the two communities. However, these gains tend to be unequally distributed over the two communities. As a result, in a large range of circum- stances these policies might not draw su¢ cient support. The model is built upon the communicative value of languages, but also emphasizes the role of linguistic preferences in the behavior of bilingual individuals.

Regulatory federalism in network industries

Report for the scientific sojourn at the UC Berkeley, USA, from march until july 2008. This document starts by surveying the literature on economic federalism and relating it to network industries. The insights and some new developments (which focus on the role of interjurisdictional externalities, multiple objectives and investment incentives) are used to analyze regulatory arrangements in telecommunications and energy in the EU and the US. In the long history of vertically integrated monopolies in telecommunications and energy, there was a historical trend to move regulation up in the vertical structure of government, at least form the local level to the state or nation-state level. This move alleviated the pressure on regulators to renege on the commitment not to expropriate sunk investments, although it did not eliminate the practice of taxation by regulation that was the result of multiple interest group action. Although central or federal policy making is more focused and especialized and makes it difficult for more interest groups to organize, it is not clear that under all conditions central powers will not be associated with underinvestment. When technology makes the introduction of competition in some segments possible, the possibilities for organizing the institutional architechture of regulation expand. The central level may focus on structural regulation and the location of behavioral regulation of the remaining monopolists may be resolved in a cooperative way or concentrated at the level where the relevant spillovers are internalized.

Multimarket contact externalities: the effect of rival's multimarket contacts on focal firm performance

Given that firms develop their activities in a network of multiple players, interfirm rivalry is not only a matter of direct competitors, but also of indirect competition. In spite of this, the literature on competitive dynamics tends to focus on analyzing rivalry as an exclusive function of the competitive relationship between a focal firm and its direct rivals. In this article, we extend competitive dynamics literature by considering how focal firms are affected by the relationships of their rivals with third-party firms. Specifically, we study the effect that the multimarket contacts of rivals produces on the performance of the focal firm. Additionally, we incorporate the idea that there are different strategic options for operating in an industry that affect the intensity of multimarket contact externalities. Our results show that multimarket contact among firms causes externalities that indirectly affect firms that are not directly involved in this competitive relationship. We find that multimarket contact externalities differ between and within strategic groups.

The Barcelonnettes: an example of network-entrepreneurs in XIX century Mexico. An explanation based on a theory of bounded rational choice with social embeddedness

A theory of network-entrepreneurs or "spin-off system" is presented in this paper for the creation of firms based on the community’s social governance. It is argued that firm’s capacity for accumulation depends on the presence of employees belonging to the same social/ethnic group with expectations of "inheriting" the firm and becoming entrepreneurs once they have been selected for their merits and loyalty towards their patrons. Such accumulation is possible because of the credibility of the patrons’ promises of supporting newcomers due to high social cohesion and specific social norms prevailing in the community. This theory is exemplified through the case of the Barcelonnettes, a group of immigrants from the Alps in the South of France (Provence) who came to Mexico in the XIX Century.

Efficient bidding with externalities

We implement a family of efficient proposals to share benefits generated in environments with externalities. These proposals extend the Shapley value to games with externalities and are parametrized through the method by which the externalities are averaged. We construct two slightly different mechanisms: one for environments with negative externalities and the other for positive externalities. We show that the subgame perfect equilibrium outcomes of these mechanisms coincide with the sharing proposals.

Sharing the surplus: a just and efficient proposal for environments with externalities

Economic activities, both on the macro and micro level, often entail wide-spread externalities. This in turn leads to disputes regarding the compensation levels to the various parties affected. We propose a general, yet simple, method of deciding upon the distribution of the gains (costs) of cooperation in the presence of externalities. This method is shown to be the unique one satisfying several desirable properties. Furthermore, we illustrate the use of this method to resolve the sharing of benefits generated by international climate control agreements.

Consumption externalities, habit formation, and equilibrium efficiency

We analyze the welfare properties of the competitive equilibrium in a capital accumulation model where individual preferences are subjected to both habit formation and consumption spillovers. We also discuss how consumption externalities and habits interact to generate an inefficient dynamic equilibrium. Finally, we characterize optimal tax policies aimed to restore efficient decentralized paths.

Income taxation with habit formation and consumption externalities

We analyze the dynamic behavior and the welfare properties of the equilibrium path of a growth model where both habits and consumption externalities affect the utility of consumers. We discuss the effects of flat rate income taxes and characterize the optimal income taxation policy. We show that, when consumption externalities and habit adjusted consumption are not perfect substitutes, a counter-cyclical income tax rate allows the competitive equilibrium to replicate the efficient path. Our analysis highlights the crucial role played by complementarities between externalities and habits in order to generate an inefficient dynamic equilibrium.

Repeated games played in a network

Delayed perfect monitoring in an infinitely repeated discounted game is modelled by letting the players form a connected and undirected network. Players observe their immediate neighbors' behavior only, but communicate over time the repeated game's history truthfully throughout the network. The Folk Theorem extends to this setup, although for a range of discount factors strictly below 1, the set of sequential equilibria and the corresponding payoff set may be reduced. A general class of games is analyzed without imposing restrictions on the dimensionality of the payoff space. This and the bilateral communication structure allow for limited results under strategic communication only. As a by-product this model produces a network result; namely, the level of cooperation in this setup depends on the network's diameter, and not on its clustering coefficient as in other models.

Airline competition and network structure

This paper characterizes the equilibria in airline networks and their welfare implications in an unregulated environment. Competing airlines may adopt either fully-connected (FC) or hub-and-spoke (HS) network structures; and passengers exhibiting low brand loyalty to their preferred carrier choose an outside option to travel so that markets are partially served by airlines. In this context, carriers adopt hubbing strategies when costs are sufficiently low, and asymmetric equilibria where one carrier chooses a FC strategy and the other chooses a HS strategy may arise. Quite interestingly, flight frequency can become excessive under HS network configurations.

The Spread of free-riding behavior in a social network

We study a model where agents, located in a social network, decide whether to exert effort or not in experimenting with a new technology (or acquiring a new skill, innovating, etc.). We assume that agents have strong incentives to free ride on their neighbors' effort decisions. In the static version of the model efforts are chosen simultaneously. In equilibrium, agents exerting effort are never connected with each other and all other agents are connected with at least one agent exerting effort. We propose a mean-field dynamics in which agents choose in each period the best response to the last period's decisions of their neighbors. We characterize the equilibrium of such a dynamics and show how the pattern of free riders in the network depends on properties of the connectivity distribution.