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We analyze the effects of various taxes on competing two-sided platforms. First, we consider nondiscriminating taxes. We show that specific taxes are entirely passed to the agents on the side on which they are levied; other agents and platforms are left unaffected. Transaction taxes hurt agents on both sides and benefit platforms. Ad valorem taxes are the only tax instrument that allows the tax authority to capture part of the platforms' profits. Second, regarding asymmetric taxes, we show that agents on the untaxed side benefit from the tax. At least one platform, possibly the taxed one, benefits from the tax.

An arbitrary number of (ex ante symmetric) firms first choose whether to produce a high-quality or a low-quality product and then, the quantity of product to put on the market. We establish the following results: (i) there exists competition within and across quality segments; (ii)firms ma be better off producing the low quality if competition within this segment is sufficiently low; (iii) a firm's switch across qualities may benefit all the other firms; (iv) there exists a unique partition of the firms between the two quality segments; (v) if high quality has a larger cost-quality ratio, then the equilibrium exhibits vertical differentiation; (vi) there may be too much differentiation from the consumers' point of view.

Two duopolists compete in price on the market for a homogeneous product. They can 'profile' consumers, i.e., identify their valuations with some probability. If both firms can profile consumers but with different abilities, then they achieve positive expected profits at equilibrium. This provides a rationale for firms to (partially and unequally) share data about consumers, or for data brokers to sell different customer analytics to competing firms. Consumers prefer that both firms profile exactly the same set of consumers, or that only one firm profiles consumers, as this entails marginal cost pricing (so does a policy requiring list prices to be public). Otherwise, more protective privacy regulations have ambiguous effects on consumer surplus.

We introduce within-group external effects in the two-sided singlehoming model of Armstrong (2006) . First, we propose a general characterization of the platform access fees at the symmetric equilibrium of the game. Second, we combine this general formulation with a specific modeling of the relationship between buyers and sellers on B2C platforms, so as to analyze how changes in the underlying characteristics of the product market affect the equilibrium of the game. We show that sellers may be better off, and buyers worse off, in markets with more sellers. We also show that sellers and buyers prefer full product differentiation while platforms prefer no differentiation.

In the spirit of Arrow (The Rate and Direction of Inventive Activity, Princeton, NJ, Princeton University Press, 1962), we examine, in an oligopoly model with horizontally differentiated products, how much a firm is willing to pay for a process innovation that it would be the only one to use. We show that different measures of competition (number of firms, degree of product differentiation, Cournot vs. Bertrand) affect incentives to innovate in non-monotonic, different and potentially opposite ways.

Two types of agents interact on a pre-existing free platform. Agents value positively the presence of agents of the other type but may value negatively the presence of agents of their own type. We ask whether a new platform can find fees and subsidies so as to divert agents from the existing platform and make a profit. We show that this might be impossible if intra-group negative externalities are sufficiently (but not too) strong with respect to positive inter-group externalities. © (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Industrial Organization: Markets and Strategies provides an up-to-date account of modern industrial organization that blends theory with real-world applications. Written in a clear and accessible style, it acquaints the reader with the most important models for understanding strategies chosen by firms with market power and shows how such firms adapt to different market environments. It covers a wide range of topics including recent developments on product bundling, branding strategies, restrictions in vertical supply relationships, intellectual property protection, and two-sided markets, to name just a few. Models are presented in detail and the main results are summarized as lessons. Formal theory is complemented throughout by real-world cases that show students how it applies to actual organizational settings. The book is accompanied by a website containing a number of additional resources for lecturers and students, including exercises, answers to review questions, case material and slides.

Price discrimination consists in selling the same product to different buyers at different prices. When sellers cannot relate a buyer's willingness to pay to some observable characteristics, price discrimination can be achieved by targeting a specific package (i.e., a selling contract that includes various clauses in addition to price) for each class of buyers. The seller faces then the problem of designing the menu of packages in such a way that each consumer indeed chooses the package targeted for her. This practice, known as versioning (or as second-degree price discrimination), is widespread in the information economy. In this paper, we propose a simple unified framework to study the general theory behind versioning and to consider a number of specific versioning strategies used in the information economy (namely, bundling, functional degradation and conditioning prices on purchase history)

This is a successive oligopoly model with two brands. Each downstream firm chooses one brand to sell on a final market. The upstream firms specialize in the production of one input specifically designed for the production of one brand, but they also produce the input for the other brand at an extra cost. We show that when more downstream firms choose one brand, more upstream firms will specialize in the input specific to that brand, and vice versa. Hence, multiple equilibria are possible and the softening effect of brand differentiation on competition might not be strong enough to induce maximal differentiation. The existence of equilibria and their welfare performance are also examined.

We study how producers of cultural goods can strategically increase their promotion budgets to secure the most profitable release dates for their goods. In a game-theoretic setting, where two producers choose their budget before simultaneously setting the release date of their good, we prove that two equilibria are possible: releases are either simultaneous (at the demand peak) or staggered (one producer delays). In the latter equilibrium, the first-mover secures its position by investing more in promotion. We test this prediction on a dataset of more than 1500 American movies released in ten countries over 13 years. Our empirical analysis confirms that higher budgets allow movie studios to move release dates closer to demand peaks.

This paper provides a description of the crowdfunding sector, considering investment-based crowdfunding platforms as well as platforms in which funders do not obtain monetary payments. It lays out key features of this quickly developing sector and explores the economic forces at play that can explain the design of these platforms. In particular, it elaborates on cross-group and within-group external effects and asymmetric information on crowdfunding platforms.

This paper compares experimentation about product differentiation in a linear setting under four market structures: quantity-setting and price-setting monopoly, Cournot and Bertrand duopoly. Quantity-setting firms always experiment by raising their quantities and the monopolist experiments relatively more than the duopolists. A price-setting monopolist does not experiment. The value of information to Bertrand duopolists may be positive or negative depending on the degree of product differentiation. When information is valuable, price-setting duopolists experiment by lowering prices. A numerical example indicates that the intensity of experimentation is higher in a Cournot duopoly than in a Bertrand duopoly. (C) 2001 Elsevier Science BY All rights reserved.

Empirical studies suggest that the huge investment in information technologies (IT) of the past two decades has led to no significant increase in productivity; this phenomenon is known as the ‘productivity paradox’. It has been argued that the paradox might result from oligopolistic competition: because of strategic interaction, each individual firm might find it profitable to invest in cost-reducing IT, but total investment might then be excessive from the industry’s point of view. I confirm this view and strengthen it by allowing IT investment to be also devoted to product differentiation which makes the productivity paradox more likely. The emergence of Web-based electronic commerce provides an illustration of the forces identified in the model.

This paper investigates the impact of localization economies on firms' locations. It is known that such external effects lead to substantial cost reductions when firms are located together. However, when they are agglomerated, firms also face the prospects of tough price competition whose intensity can be relaxed through product differentiation. In addition, their access to isolated markets varies with the level of transport costs. As a result, there is a trade-off whose solution depends on the structural parameters of the economy. The market and optimal solutions are compared for the case of small and large groups of firms.

When firms can supply several separate markets, collusion can take two forms. Either firms establish production quotas on all the markets, or they share markets. This paper compares production quotas and market sharing agreements in a Cournot duopoly where firms incur a fixed cost for serving each market. We show that there exists a threshold value of the fixed cost such that collusion is easier to sustain with production quotas below the threshold and with market sharing agreements above the threshold. These results are obtained both under Nash reversion strategies and the globally optimal punishment strategies introduced by Abreu (1986).

We analyze a two-stage non-cooperative game where the firms choose first to adopt (either simultaneously or sequentially) one of two network technologies, and then compete on the market. The two-stage procedure and the assumption that firms have heterogeneous tastes with respect to the technologies lead to a novel treatment of network externalities. In particular, as the network of some firm enlarges, the change in this firm's payoff is shown to depend both on the newcomer's identity and on the composition of the networks and, as a result, is not necessarily positive.

This article reviews some recent developments in the study of crowdfunding -- i.e., the practice of raising funds through an open call on the Internet. It also shows how microeconomic theory can help us understand some important aspects of crowdfunding that go beyond the finance sphere of the firm. A special attention is devoted to the role and behavior of crowdfunding platforms, which intermediate between entrepreneurs and contributors. Throughout the article, the Belgian market for crowdfunding serves as the main source of illustrations.

This study investigates characteristics of individual crowdfunding practices and drivers of fundraising success, where entrepreneurs can tailor their crowdfunding initiatives better than on standardized platforms. Our data indicate that most of the funds provided are entitled to receive either financial compensations (equity, profit-share arrangement) or non-financial benefi ts (final product, token of appreciation), while donations are less common. Moreover, crowdfunding initiatives that are structured as non-profit organizations tend to be significantly more successful than other organizational forms in achieving their fundraising targets, even after controlling for various project characteristics. This finding is in line with theoretical arguments developed by the contract failure literature that postulates that non-profit organizations may find it easier to attract money for initiatives that are of interest for the general community due to their reduced focus on profits.

Introduction to Part VIII: Networks, standards and systems Information products and technologies are rarely used in isolation or just for their own sake. Take the example of instant messaging (IM) services , whose primary functionality is to allow you to exchange text messages with other users over the Internet in real time. The first IM services (like AOL Instant Messenger, Yahoo! Messenger or Windows Live Messenger) were used on computers and often bundled with a particular web browser. With the advent of smartphones, instant messaging became increasingly mobile and a number of IM applications (like Whatsapp, WeChat, Line, Viber, Kakao Talk, etc.) were made compatible with the major smartphone platforms (Android, iOS, BlackBerry, Windows Phone). Regardless of the supporting technology, adopting a particular IM service involves for users a larger set of considerations than the purchase of, say, a bag of potatoes. In particular, a user of an IM service must care about what other users are doing . The benefits of using the service come, indeed, from two sources: first and foremost, the ability to chat with other users and potentially, the additional features that can be used within the IM application (such as editing pictures, recording down moments of your life, following accounts of celebrities or obtaining discounts from tied-up partners). What is important to stress is that the benefits for an individual user increase with the number of other users of the service : either directly for the communication benefits (a larger base of users directly increases the number of potential contacts any user can have via the IM service), or indirectly for the benefits related to additional features (a larger base of users induces providers to supply more and/or better features to be combined with the IM service, which in turn raises the attractiveness of the service). We use the term network to describe the community of users whose benefits are made interdependent by the nature of the product they use. By analogy, we call goods like IM services network goods.

Introduction to Part IV: Pricing strategies and market segmentation Consider the book you have in your hands and suppose, for now, that this is the only IO textbook on the market, so that we, the authors, are in a monopoly position. To introduce this part, we want to illustrate here how the profit we (or, more correctly, our publisher) can make by selling our book depends on the information we have about our potential consumers, and on the range of instruments we can use to design our tariffs. With limited information and instruments, the best we can do is to set a ‘one-size-fits-all’, uniform price for all our potential consumers. However, more information and instruments allow us to increase our profit. Regarding the information about the consumers, it is not enough to know that consumers differ in their willingness to pay for our book; the crucial issue is to know who is willing to pay what. Armed with such knowledge, we can increase profit by setting different prices to different consumers, a practice generally known as price discrimination , presuming that resale is not possible or sufficiently costly. In some situations, the consumers’ willingness to pay can be directly inferred from some observable characteristics. Ideally, we would like to know exactly how much each potential consumer is willing to pay for the book; we would then make a personalized take-it-or-leave-it offer to each of them by quoting a price just below the consumer's reservation price; we would thereby appropriate the entire consumer surplus. More realistically, we can use market data analysis to segment our market in several groups, with the consumers in each group sharing some common characteristics and correlated willingness to pay. For instance, we can segment the market on a geographical basis and sell the book at different prices, say, in the USA and in Europe if market research reveals that those two markets exhibit different demand functions. In other situations, however, there is no direct way to segment the market based on some observable characteristics. In such cases, we can still increase our profit by using an incentive-compatible mechanism whereby consumers reveal their willingness to pay to us.

In many markets, firms offer the same product in different periods and consumers buy only one item over the whole time horizon. This description of consumer behaviour fits particularly well for durable goods such as cars, washing machines (and other household appliances), computers and software (which does not wear out at all unless obsolescence is artificially imposed). It also fits for particular items that can be ordered in advance, such as a holiday package, a plane ticket or a concert ticket. While our insight derived in the first two sections of this chapter only applies to durable goods, we then obtain results that also apply to ticket sales. In the case of durable goods, consumers derive the benefit from the purchase of the good over a number of periods. Also, consumers can decide on the timing of their purchase. An example is furniture that consumers may want to replace. They may buy the piece immediately and replace the old piece, or keep the old piece for some time and thus postpone the purchase of the desired piece. Suppose that a firm sells a product over a number of periods and that both firm and consumers have discount factor δ . If the firm sells the product in the first period only at a uniform price, it makes the standard monopoly profit (see Chapter 2). If the firm can sell the product over several periods, we may think that this opens up the possibility of price discrimination, which is beneficial for the firm. Whether this conjecture is correct depends on a number of circumstances, as we will explore in this chapter. An important issue is whether a firm can commit to future prices and if the answer is negative, what kind of prices consumers expect. Clearly, even if a firm preannounces future prices, we must ask whether the firm has an incentive to deviate at some later point. Therefore, as a starting point, we consider the situation in which the firm lacks any commitment power and sets the period t price in that period, not earlier (Section 10.1). We then redo the analysis under the assumption that the firm has an instrument that gives it commitment power over future prices (Section 10.2).

Firms that sell products usually require inputs, which are produced by other firms in an upstream industry (which again may require inputs from other firms). This leads to a vertical supply chain that is needed to produce a final product. Up until now, we have analysed various forms of competition at one level of the vertical supply chain. This approach is appropriate if inputs are provided in a perfectly competitive way under constant marginal costs. In this case, the input price is equal to the marginal cost that is incurred upstream and this input price does not vary with input supply. However, inputs are often also provided by firms with market power. We then have to take the whole vertical supply chain into account to understand how markets function. For instance, can upstream firms deny competitors access to their distribution channel, for example, because they have signed an exclusive dealing contract with their retailers? Also, what are the effects of vertical mergers? We start in Section 17.1 with the traditional double-marginalization problem within a monopoly context and explore the consequences of allowing contracts between the upstream and downstream firm that differ from linear pricing. In Section 17.2, we analyse the role of resale-price maintenance and exclusive territories. In Section 17.3, we address the role of exclusive dealing contracts. Finally, in Section 17.4, we analyse a model with an oligopolistic industry upstream and downstream. We examine the effects of vertical mergers in such markets. The double-marginalization problem A pricing inefficiency in vertically related markets stems from the so-called double-marginalization problem. The idea is the following: in a market with firms operating only at one level of a vertical supply chain, retail prices are higher than in a market with vertically integrated firms because a downstream firm applies a margin to the wholesale price which includes the margin of an upstream firm. The inefficiency arises because the retailer does not take into account the externality exerted on the upstream firm by changing the retail price. We first formally develop this insight within a monopoly context. We next examine contractual solutions to this problem. Finally, we consider the impact of double marginalization on the provision of retailing services.

Firms have various strategic options at their disposal. In the most basic models of strategic interaction, firms choose a single strategic variable, quantity or price, once. In many markets, firms are seen as price setters. It thus appears natural to start with the analysis of price-setting firms in an environment with a few firms; we do so in Section 3.1. In other markets, however, it seems more reasonable to assume that firms choose quantities rather than prices; we analyse quantity competition in Section 3.2. We then proceed to compare price and quantity competition. First, in Section 3.3, we show that quantity competition can sometimes be mimicked by a two-stage model in which firms choose their capacity of production and next, set their price; we also directly compare price and quantity competition in a unified model of product differentiation. Second, in Section 3.4, we bring the comparison of price and quantity competition to a more general level by introducing the concepts of ‘strategic complements’ and ‘strategic substitutes’. Finally, in Section 3.5, we discuss the empirical investigation of industries with market power. Price competition We analyse here several models of price competition. We start with the standard Bertrand (1883) model where products are homogeneous. Then, we extend the model in two directions: first, we assume that firms have private information about their marginal costs of production; second, we consider differentiated products.

In this short introductory chapter, we give a broad presentation of the book and indicate how we think it is best to use it. We start by explaining the title of the book: what do we mean by ‘markets’ and by ‘strategies’, and why do we associate the two terms? We argue that it is market power and the exercise of it that relate markets and strategies to one another. Next, we outline the approach that we adopt in this book: we believe in formal modelling, which explains that the book is theory-based; yet, we also believe that it is important not to overload readers with techniques and to motivate the analysis with real-life cases; our aim is thus to blend up-to-date theoretical developments and real-life applications in a rigorous and concise manner. Finally, we describe the level, the scope and the organization of the book. Markets Markets allow buyers and sellers to exchange goods and services in return for a monetary payment. Markets come in a myriad of different varieties. Examples are your local farmers' markets (local) and the market for passenger jets (global), the market for computer software (product) and software support (service), the market for electricity (homogeneous product) and markets for highly specialized steel (differentiated product). These markets may exist in physical or virtual space.

In a standard adverse selection world, asymmetric information about product quality leads to quality deterioration in the market. Suppose that a higher investment level makes the realization of high quality more likely. Then, if consumers observe the investment (but not the realization of product quality) before purchase, they can infer the probability distribution of high and low quality that may be put on the market. We uncover two effects that may lead the firm to overinvest in quality compared to a market with full information: first, an adverse selection effect according to which a sufficiently large investment can avoid adverse selection and, second, an efficiency effect according to which a larger investment reduces the probability of having in the market low quality products that are not socially valuable.

According to standard economic wisdom, asymmetric information about product quality leads to a quality deterioration in the market. Suppose that a higher investment level makes the realization of high quality more likely. Then, if consumers observe the investment (but not the realization of product quality) before purchase, they can infer the probability distribution of high and low quality that may be put on the market. This, as we show, may make the firm overinvest in quality compared to a market with full information.

In the spirit of Arrow (The Rate and Direction of Inventive Activity, Princeton, NJ, Princeton University Press, 1962), we examine, in an oligopoly model with horizontally differentiated products, how much a firm is willing to pay for a process innovation that it would be the only one to use. We show that different measures of competition (number of firms, degree of product differentiation, Cournot vs. Bertrand) affect incentives to innovate in non-monotonic, different and potentially opposite ways.

When firms can supply several separate markets, collusion can take two forms. Either firms establish production quotas on all the markets, or they share markets. This paper compares production quotas and market sharing agreements in a Cournot duopoly where firms incur a fixed cost for serving serving each market. We show that there exists a threshold value of the fixed cost such that collusion is easier to sustain with production quotas below the threshold and with market sharing agreements above the threshold. These results are obtaines both under Nash reversion strategies and the globally optimal punishment strategies introduced by Abreu (1986).

e catholique de Louvain, Belgium The effects of (private, small-scale) piracy on the pricing behavior of producers of information goods are studied within a unified model of vertical differentiation. Although information goods are assumed to be perfectly differentiated, demands are interdependent because the copying technology exhibits increasing returns to scale. We characterize the Bertrand-Nash equilibria in a duopoly. Comparing equilibrium prices to the prices set by a multiproduct monopolist, we show that competition drives prices up and may lead to price dispersion. Competition reduces total surplus in the short run but provides higher incentives to create in the long run.

The effects of (private, small-scale) copying on the pricing behavior of producers of information goods are studied within a unified model of vertical differentiation. Although information goods are assumed to be perfectly horizon tally differentiated, demands are interdependent because the copying technology exhibits increasing returns to scale. We characterize the symmetric Nash equilibria of the pricing game played by n producers of information goods. We show thereby how the producers' attitudes towards piracy are interdependent and evolve with the relative attractiveness of copies.

The eects of piracy on the pricing behavior of producers of information goods is studied within a uni…ed model a la Mussa-Rosen (1978). When the copying technology involves a marginal cost and no …xed cost, producers act independently. In this simple framework, we highlight the trade-o¤ between ex ante and ex post e¢ciency considerations (how to provide the right incentives to create whilst limiting monopoly distortions?). When the copying technology involves a …xed cost and no marginal cost, pricing decisions are interdependent. We investigate the strategic pricing game by focussing on some signi…cant symmetric Nash equilibria.

This paper analyzes the role of yardstick competition for improving political decisions. We examine how performance comparisons across jurisdictions affect the agency problem resulting from uncertainty about politicians (adverse selection) and their policies (moral hazard). We study two forms of inefficiency: the provision of wasteful project and the failure to provide useful project .We find a general neutrality result: yardstick competition does not affect the likelihood of fully efficient equilibria for any correlation (with a discontinuity at perfect correlation). We also find that yardstick competition has no effect on the likelihood of inefficient equilibria in which politicians refrain from implementing valuable projects. However, performance comparisons makes it less likely to have an equilibrium where bad politicians in both jurisdictions use wasteful projects as inefficient transfer forms.

This paper analyzes the role of yardstick competition for improving political decisions. We examine how performance comparisons across jurisdictions affect the agency problem resulting from uncertainty about politicians (adverse selection) and their policies (moral hazard). We study two forms of inefficiency: the provision of non-valuable programmes (over-provision) and the failure to provide valuable programmes (under-provision). We find a general neutrality result: yardstick competition does not affect the chance that at least one type of politician in one jurisdiction will take inefficient decision, nor does it affect the risk of underproviding good programmes. However, performance comparisons reduce the risk of providing bad programmes in both jurisdictions.

This paper analyzes the formation of market sharing agreements among firms in oligopolistic markets and procurement auctions. The set of market sharing agreements defines a collusive network, and the paper provides a complete characterization of stable and efficient collusive networks when firms and markets are symmetric. Efficient networks are regular networks, where firms have the same number of market sharing agreements. Stable networks are formed of complete alliances, of different sizes, larger than a minimal threshold. Typically, stable networks display fewer market sharing agreements than the optimal network for the industry and more market sharing agreements than the socially optimal network. When firms or markets are asymmetric, incomplete alliances can form in stable networks, and stable networks may be underconnected with respect to the social optimum.

This is a successive oligopoly model with two brands. Each downstream firm chooses one brand to sell on a final market. The upstream firms specialize in the production of one input specifically designed for the production of one brand, but they also produce the input for the other brand at an extra cost. We show that when more downstream firms choose one brand, more upstream firms will specialize in the input specific to that brand, and vice versa. Hence, multiple equilibria are possible and the softening effect of brand differentiation on competition might not be strong enough to induce maximal differentiation. The existence of equilibria and their welfare performance are also examined.