Volume 9, Issue 3

This short article explains why merchants accept expensive payment cards when merchants are Cournot competitors. The same acceptance rule as the Hotelling price competition model of Rochet and Tirole (2002) is derived. Unlike the models used in the existing literature, in the Cournot setting without free entry of merchants, payment card acceptance expands merchant output and increases merchant profit in equilibrium. With free entry, payment card acceptance increases the number of merchants in the industry and industry output.

We consider a model of Internet interconnection. We characterize the Myerson value as the bargaining outcome in interconnection agreements in given networks and provide its interpretation in terms of "betweenness centrality." Then, in an extended network formation model, we characterize the structures of the efficient network and the stable network and confirm the disparity between them. We also identify the condition for the disparity to disappear under bill-and-keep agreements. The possibility of multi-homing and secondary peering is briefly discussed.

The FCC is currently considering whether it should adopt a uniform rate for pole attachment services for broadband services. Based on Ramsey pricing principles, we find that while historical differences in rates were sensible, technological convergence dictates that broadband providers should now pay a unified rate and that rate should be significantly lower than the rates currently applied.

We examine the evidence available on the efficacy of demand-side programs intended to stimulate broadband adoption. We review studies that attempt to measure results. Our suggestions for future program evaluations are to include cost-benefit analysis as a standard part of program review and to make clear that the purpose of evaluation is to assess progress made toward the ultimate policy goals rather than the program’s proximate implementation goals. Appropriate data must be collected to draw conclusions, and appropriate statistical methods must be used to determine the causal impacts of a program. This has rarely been done to date.

This paper derives an optimal allocation rule (?*) that (i) assigns a share of the transaction price to the buyer-side of the two-sided market; (ii) is equivalent to the Rochet-Tirole price structure rule; and (iii) is a function of the own/cross-price elasticities. For linear demands, demand symmetry is sufficient for ?* = ½ and ?* is decreasing (increasing) in the own-price (cross-price) sensitivity parameter of buyer-side demand.