The new economy: Essays in network economics and two-sided markets

Following the Introduction, which surveys existing literature on the technology advances and regulation in telecommunications and on two-sided markets, we address specific issues on the industries of the New Economy, featured by the existence of network effects. We seek to explore how each one of these industries work, identify potential market failures and find new solutions at the economic regulation level promoting social welfare. In Chapter 1 we analyze a regulatory issue on access prices and investments in the telecommunications market. The existing literature on access prices and investment has pointed out that networks underinvest under a regime of mandatory access provision with a fixed access price per end-user. We propose a new access pricing rule, the indexation approach, i.e., the access price, per end-user, that network i pays to network j is function of the investment levels set by both networks. We show that the indexation can enhance economic efficiency beyond what is achieved with a fixed access price. In particular, access price indexation can simultaneously induce lower retail prices and higher investment and social welfare as compared to a fixed access pricing or a regulatory holidays regime. Furthermore, we provide sufficient conditions under which the indexation can implement the socially optimal investment or the Ramsey solution, which would be impossible to obtain under fixed access pricing. Our results contradict the notion that investment efficiency must be sacrificed for gains in pricing efficiency. In Chapter 2 we investigate the effect of regulations that limit advertising airtime on advertising quality and on social welfare. We show, first, that advertising time regulation may reduce the average quality of advertising broadcast on TV networks. Second, an advertising cap may reduce media platforms and firms' profits, while the net effect on viewers (subscribers) welfare is ambiguous because the ad quality reduction resulting from a regulatory cap o¤sets the subscribers direct gain from watching fewer ads. We find that if subscribers are sufficiently sensitive to ad quality, i.e., the ad quality reduction outweighs the direct effect of the cap, a cap may reduce social welfare. The welfare results suggest that a regulatory authority that is trying to increase welfare via regulation of the volume of advertising on TV might necessitate to also regulate advertising quality or, if regulating quality proves impractical, take the effect of advertising quality into consideration. 3 In Chapter 3 we investigate the rules that govern Electronic Payment Networks (EPNs). In EPNs the No-Surcharge Rule (NSR) requires that merchants charge at most the same amount for a payment card transaction as for cash. In this chapter, we analyze a three- party model (consumers, merchants, and a proprietary EPN) with endogenous transaction volumes and heterogenous merchants' transactional benefits of accepting cards to assess the welfare impacts of the NSR. We show that, if merchants are local monopolists and the network externalities from merchants to cardholders are sufficiently strong, with the exception of the EPN, all agents will be worse o¤ with the NSR, and therefore the NSR is socially undesirable. The positive role of the NSR in terms of improvement of retail price efficiency for cardholders is also highlighted.

Oligopoly Model of a Debit Card Network

JEL Classification: G21, L13.

Designing tools that enhance communication and understanding between multiple stakeholders: the case of mobile payment value networks

The pervasive use of mobile technologies has provided new opportunities for organisations to achieve competitive advantage by using a value network of partners to create value for multiple users. The delivery of a mobile payment (m-payment) system is an example of a value network as it requires the collaboration of multiple partners from diverse industries, each bringing their own expertise, motivations and expectations. Consequently, managing partnerships has been identified as a core competence required by organisations to form viable partnerships in an m-payment value network and an important factor in determining the sustainability of an m-payment business model. However, there is evidence that organisations lack this competence which has been witnessed in the m-payment domain where it has been attributed as an influencing factor in a number of failed m-payment initiatives since 2000. In response to this organisational deficiency, this research project leverages the use of design thinking and visualisation tools to enhance communication and understanding between managers who are responsible for managing partnerships within the m-payment domain. By adopting a design science research approach, which is a problem solving paradigm, the research builds and evaluates a visualisation tool in the form of a Partnership Management Canvas. In doing so, this study demonstrates that when organisations encourage their managers to adopt design thinking, as a way to balance their analytical thinking and intuitive thinking, communication and understanding between the partners increases. This can lead to a shared understanding and a shared commitment between the partners. In addition, the research identifies a number of key business model design issues that need to be considered by researchers and practitioners when designing an m-payment business model. As an applied research project, the study makes valuable contributions to the knowledge base and to the practice of management.

Formal analysis of card-based payment systems in mobile devices

To provide card holder authentication while they are conducting an electronic transaction using mobile devices, VISA and MasterCard independently proposed two electronic payment protocols: Visa 3D Secure and MasterCard Secure Code. The protocols use pre-registered passwords to provide card holder authentication and Secure Socket Layer/ Transport Layer Security (SSL/TLS) for data confidentiality over wired networks and Wireless Transport Layer Security (WTLS) between a wireless device and a Wireless Application Protocol (WAP) gateway. The paper presents our analysis of security properties in the proposed protocols using formal method tools: Casper and FDR2. We also highlight issues concerning payment security in the proposed protocols.

A method of fraud & intrusion detection for e-payment systems in mobile

The need for paying with mobile devices has urged the development of payment systems for mobile electronic commerce. In this paper we have considered two important abuses in electronic payments systems for detection. The fraud, which is an intentional deception accomplished to secure an unfair gain, and an intrusion which are any set of actions that attempt to compromise the integrity, confidentiality or availability of a resource. Most of the available fraud and intrusion detection systems for e-payments are specific to the systems where they have been incorporated. This paper proposes a generic model called as Activity-Event-Symptoms(AES) model for detecting fraud and intrusion attacks which appears during payment process in the mobile commerce environment. The AES model is designed to identify the symptoms of fraud and intrusions by observing various events/transactions occurs during mobile commerce activity. The symptoms identification is followed by computing the suspicion factors for event attributes, and the certainty factor for a fraud and intrusion is generated using these suspicion factors. We have tested the proposed system by conducting various case studies, on the in-house established mobile commerce environment over wired and wire-less networks test bed.

Threats and trade-fffs in resource critical crowdsourcing tasks over networks

In recent times, crowdsourcing over social networks has emerged as an active tool for complex task execution. In this paper, we address the problem faced by a planner to incen-tivize agents in the network to execute a task and also help in recruiting other agents for this purpose. We study this mecha-nism design problem under two natural resource optimization settings: (1) cost critical tasks, where the planner’s goal is to minimize the total cost, and (2) time critical tasks, where the goal is to minimize the total time elapsed before the task is executed. We define a set of fairness properties that should beideally satisfied by a crowdsourcing mechanism. We prove that no mechanism can satisfy all these properties simultane-ously. We relax some of these properties and define their ap-proximate counterparts. Under appropriate approximate fair-ness criteria, we obtain a non-trivial family of payment mech-anisms. Moreover, we provide precise characterizations of cost critical and time critical mechanisms.

Evolutionary methods for self-organizing cooperation in peer-to-peer networks

The Peer-to-Peer network paradigm is drawing the attention of both final users and researchers for its features. P2P networks shift from the classic client-server approach to a high level of decentralization where there is no central control and all the nodes should be able not only to require services, but to provide them to other peers as well. While on one hand such high level of decentralization might lead to interesting properties like scalability and fault tolerance, on the other hand it implies many new problems to deal with. A key feature of many P2P systems is openness, meaning that everybody is potentially able to join a network with no need for subscription or payment systems. The combination of openness and lack of central control makes it feasible for a user to free-ride, that is to increase its own benefit by using services without allocating resources to satisfy other peers’ requests. One of the main goals when designing a P2P system is therefore to achieve cooperation between users. Given the nature of P2P systems based on simple local interactions of many peers having partial knowledge of the whole system, an interesting way to achieve desired properties on a system scale might consist in obtaining them as emergent properties of the many interactions occurring at local node level. Two methods are typically used to face the problem of cooperation in P2P networks: 1) engineering emergent properties when designing the protocol; 2) study the system as a game and apply Game Theory techniques, especially to find Nash Equilibria in the game and to reach them making the system stable against possible deviant behaviors. In this work we present an evolutionary framework to enforce cooperative behaviour in P2P networks that is alternative to both the methods mentioned above. Our approach is based on an evolutionary algorithm inspired by computational sociology and evolutionary game theory, consisting in having each peer periodically trying to copy another peer which is performing better. The proposed algorithms, called SLAC and SLACER, draw inspiration from tag systems originated in computational sociology, the main idea behind the algorithm consists in having low performance nodes copying high performance ones. The algorithm is run locally by every node and leads to an evolution of the network both from the topology and from the nodes’ strategy point of view. Initial tests with a simple Prisoners’ Dilemma application show how SLAC is able to bring the network to a state of high cooperation independently from the initial network conditions. Interesting results are obtained when studying the effect of cheating nodes on SLAC algorithm. In fact in some cases selfish nodes rationally exploiting the system for their own benefit can actually improve system performance from the cooperation formation point of view. The final step is to apply our results to more realistic scenarios. We put our efforts in studying and improving the BitTorrent protocol. BitTorrent was chosen not only for its popularity but because it has many points in common with SLAC and SLACER algorithms, ranging from the game theoretical inspiration (tit-for-tat-like mechanism) to the swarms topology. We discovered fairness, meant as ratio between uploaded and downloaded data, to be a weakness of the original BitTorrent protocol and we drew inspiration from the knowledge of cooperation formation and maintenance mechanism derived from the development and analysis of SLAC and SLACER, to improve fairness and tackle freeriding and cheating in BitTorrent. We produced an extension of BitTorrent called BitFair that has been evaluated through simulation and has shown the abilities of enforcing fairness and tackling free-riding and cheating nodes.

Approaching unbanked people: a person-to-person payment application on Facebook

More than 2.5 billion people are still unbanked and they do not access or use financial services. In this paper, we present an innovative service that allows Santander University Smart Card holders to make person-to-person payments to their friends, using different social channels, such as Telegram, Facebook or Twitter. Our first implementation is based on Facebook, one of the most used social networks. This approach allows the service to reach a great number of potential users but the delivery and stability of the service depends on an external provider. We include the description of the service architecture, its implementation, tests, and the lessons learned from the development. We also discuss pros and cons of the third party service dependency from the technical and business viewpoints.

Technology transfer through international manufacturing networks:valuing technology from an owner’s perspective

Technology is a key part of organisational knowledge and gives its owners their distinctive capabilities and competitive advantages. However, to best use these assets technology often needs to be transferred and shared with others through a form of technology collaboration. This raises the important question of how technology should be valued when it is being transferred. Technology valuation has become a critical issue in most transfer transactions. Transfer arrangements and terms of payment have a significant effect on the generation and sharing of joint benefits in commercial, technical and strategic aspects. In this paper the concept of “owner's value” is explored by highlighting its structure and components and assessing the importance of factors affecting value. The influence on technology valuation of the transfer arrangement, the associated terms of payment and the interaction between the shared benefits, cost and risks are discussed.

Modeling security and cooperation in wireless networks using game theory

This research involves the design, development, and theoretical demonstration of models resulting in integrated misbehavior resolution protocols for ad hoc networked devices. Game theory was used to analyze strategic interaction among independent devices with conflicting interests. Packet forwarding at the routing layer of autonomous ad hoc networks was investigated. Unlike existing reputation based or payment schemes, this model is based on repeated interactions. To enforce cooperation, a community enforcement mechanism was used, whereby selfish nodes that drop packets were punished not only by the victim, but also by all nodes in the network. Then, a stochastic packet forwarding game strategy was introduced. Our solution relaxed the uniform traffic demand that was pervasive in other works. To address the concerns of imperfect private monitoring in resource aware ad hoc networks, a belief-free equilibrium scheme was developed that reduces the impact of noise in cooperation. This scheme also eliminated the need to infer the private history of other nodes. Moreover, it simplified the computation of an optimal strategy. The belief-free approach reduced the node overhead and was easily tractable. Hence it made the system operation feasible. Motivated by the versatile nature of evolutionary game theory, the assumption of a rational node is relaxed, leading to the development of a framework for mitigating routing selfishness and misbehavior in Multi hop networks. This is accomplished by setting nodes to play a fixed strategy rather than independently choosing a rational strategy. A range of simulations was carried out that showed improved cooperation between selfish nodes when compared to older results. Cooperation among ad hoc nodes can also protect a network from malicious attacks. In the absence of a central trusted entity, many security mechanisms and privacy protections require cooperation among ad hoc nodes to protect a network from malicious attacks. Therefore, using game theory and evolutionary game theory, a mathematical framework has been developed that explores trust mechanisms to achieve security in the network. This framework is one of the first steps towards the synthesis of an integrated solution that demonstrates that security solely depends on the initial trust level that nodes have for each other.^

Decentralized Clearing in Financial Networks

We consider a situation in which agents have mutual claims on each other, summarized in a liability matrix. Agents' assets might be insufficient to satisfy their liabilities leading to defaults. In case of default, bankruptcy rules are used to specify the way agents are going to be rationed. A clearing payment matrix is a payment matrix consistent with the prevailing bankruptcy rules that satisfies limited liability and priority of creditors. Since clearing payment matrices and the corresponding values of equity are not uniquely determined, we provide bounds on the possible levels equity can take. Unlike the existing literature, which studies centralized clearing procedures, we introduce a large class of decentralized clearing processes. We show the convergence of any such process in finitely many iterations to the least clearing payment matrix. When the unit of account is sufficiently small, all decentralized clearing processes lead essentially to the same value of equity as a centralized clearing procedure. As a policy implication, it is not necessary to collect and process all the sensitive data of all the agents simultaneously and run a centralized clearing procedure.