Issue 3

Maija Gao, Ari Hyytinen and Otto Toivanen
Commercialization of innovations frequently stumbles. A prominent recent example are the early (i.e., pre-3G) mobile phone-enabled Internet services, whose European take-up was slower than expected. To determine why, we build a structural model of demand for such services and estimate it using consumer-level panel data from a pricing experiment. The experiment allows a decomposition of the number of wireless connections into the number of needs—instances where a consumer would establish a connection if the price were zero—and the conditional probability of establishing a connection. We find that needs were plenty and potential consumer surplus several magnitudes higher than that attained. We find that pricing reduced usage substantially and explore potential reasons for the high prices.

Guillaume Roger and Luís Vasconcelos
We study pricing by a two-sided platform when it faces moral hazard on the sellers' side. In doing so, we introduce an equilibrium notion of platform reputation in an infinite horizon model. We find that with transaction fees only, the platform cannot eliminate the loss of reputation induced by moral hazard. If registration fees can be levied, moral hazard can be overcome. The registration fee determines the participation threshold of sellers and extracts them, whereas (lower) transaction fees provide incentives for good behavior. This provides a motivation for platforms to use registration fees in addition to transaction fees.

Deepak Hegde
How do contracts deal with the exchange of tacit knowledge, which is difficult to observe, enforce, and verify? This study compares the sample characteristics of 505 license agreements between inventors and developers of biomedical inventions with theoretical prescriptions about contractual terms when the parties’ tacit knowledge is required to commercialize the inventions. The analysis reveals that (a) three- and four-part payments are common in licenses of biomedical inventions; (b) the importance of inventors’ tacit knowledge in development activities is directly related to the magnitude of royalty rates in the licenses; and (c) the importance of developers’ tacit knowledge in development is associated with minimum annual payments when the license includes measurable benchmarks to address the shelving of inventions, and to upfront payments in the absence of such benchmarks. Firms use a complex mix of upfront and state-contingent payments, broadly consistent with theoretical prescriptions, to cope with the incentive issues inherent in the exchange of tacit knowledge.

Carlo Reggiani
The spokes model allows to address nonlocalized spatial competition between firms. In a spatial context, firms can price discriminate using location-contingent pricing. Nonlocalized competition implies that neighboring effects are not relevant to firms. This paper analyzes spatial price discrimination and location choices in the spokes model. Highly asymmetric location patterns are one outcome if the number of firms is sufficiently high: in that case, one firm supplies a generally appealing product whereas others focus on a specific niche. Moreover, multiple equilibria arise for intermediate values of the number of firms. In this case, the location patterns do not always globally minimize the sum of transport costs: asymmetric configurations distribute more efficiently the cost between firms.

Alberto Galasso and Mihkel Tombak
We develop a timing game for adopting a product technology that features a public good. We investigate the effects of the degree of product market competition, product differentiation, the private benefits from contributing to the public good, and firm asymmetries on the timing of adoption. We then examine the effects of consumer subsidies on equilibrium timings and the proliferation of the public good.