Selected Publications

Götz, Georg; Briglauer, Wolfgang and Schwarz, Anton

Margin Squeeze in Fixed-Network Telephony Markets — Competitive or Anticompetitive?

Published in: Review of Network Economics: Vol. 10: Iss. 4, Article 3. December 2011

Abstract:
This paper looks at the effects of different forms of wholesale and retail regulation on retail competition in fixed network telephony markets. We explicitly model two asymmetries between the incumbent operator and a group of homogenous entrants: (i) while the incumbent has zero marginal costs, the entrant has the wholesale access charge as (positive) marginal costs; (ii) while the incumbent sets a two-part tariff at the retail level (fixed fee and calls price), the entrant can only set a linear price for calls. We model the product of the incumbent as horizontally differentiated from the products of the entrants, who are homogenous and do not have any market power. Competition from other infrastructures such as mobile telephony or cable is modelled as an “outside opportunity” for consumers. We find that entrants without market power might be subject to a margin squeeze if the wholesale access price is set at average costs and competitive pressure from other infrastructures increases. We argue that wholesale price regulation at average costs is not optimal in such a situation and discuss other forms of cost-based regulation, retail-minus and deregulation as potential alternatives.

Keywords: access regulation, margin squeeze, telecommunications, fixed networks

JEL-Code: L12, L41, L42, L50, L96

Bender, Christian M.

How to provide access to next generation networks? The effect of risk allocation on investment and cooperation incentives

This draft: December 2011

Abstract:
This paper analyzes the incentives to invest in Next Generation Access Networks (NGA) in a framework with horizontal product differentiation with price competition between an investing and an access seeking firm. Given uncertainty about the success of the NGA, I compare regulatory regimes with symmetric and with asymmetric risk allocation to the firms having the opportunity to cooperate and jointly roll-out the NGA. I find that private incentives to cooperate might coincide with the consumer surplus maximizing outcome. Whether the firms realize this socially desirable outcome depends on the outside option, i.e. the implemented access regime. The optimal regulatory policy is not only subject to the probability that the NGA succeed but depends even more on the degree of product differentiation in the retail market. Therefore, the implementation of different access regimes subject to the degree of product differentiation seems favorable. For heterogeneous retail products, an asymmetric risk allocation not only increases the chances of cooperation but lowers the risk of overinvestment. For homogeneous goods, a symmetric risk allocation is superior as it ensures sufficient investment incentives even if competition is very intensive.

Keywords: Next Generation Access Networks, investment, access regulation, cooperation

JEL-Code: D43, K23, L13, L51, L96

Paha, Johannes (2011)

Empirical Methods in the Analysis of Collusion in Empirica 2011 38:389–415

Christian Bender, Georg Götz & Benjamin Pakula (2010)
Effective Competition: The Importance and Relevance for Network Industries, in: Intereconomics (forthcoming)

Link to the Working Paper

Götz, Georg, Briglauer, Wolfgang and Schwarz, Anton
Do we (still) need to regulate fixed network retails markets?

	This draft: November 2008 The final version is published in: Telecommunications Policy, Vol.34 (10), November 2010 (Title: "Can a margin squeeze indicate the need for deregulation? The case of fixed network voice telephony markets")
	Abstract: In the beginning of fixed network liberalisation in Europe in the late 1990s, the main concern of regulators was to lower calls prices. This was done by introducing wholesale regulation and promoting service based competition. Some years later, the concern of some regulators turned from too high calls prices to too low calls prices which might ‘squeeze’ entrants out of the market. We look at a simple model in which this development is explained by increasing competitive pressure from an ‘outside opportunity’, e.g. mobile telephony. We conclude that a margin squeeze is not necessarily used by the incumbent as a device to drive competitors out of the market and increase market power but can also result from increased inter-model competition. If this is the case, we argue that regulators should consider alternatives to cost oriented access prices such as retail minus or complete deregulation.
	Keywords: access regulation, vertical integration, foreclosure, price squeeze, telecommunications, fixed networks JEL-Code: L12, L41, L42, L50, L96

Georg Götz & Benjamin Pakula
Quality Investments and Organisational Structures - An Application to the Railway Industry

	This draft: October 2010
	Abstract: This paper analyses the incentives to upgrade input quality in vertically related (network) industries. Upstream investments have a biased effect on the downstream companies and lead to vertical product differentiation. Different vertical structures such as vertical integration, ownership and legal unbundling lead to different investments. We find that, without regulation, vertical integration and legal unbundling regimes provide highest investment incentives and lead to highest welfare. However, we also find foreclosure in the downstream market if the potential degree of horizontal product differentiation of the entrant is low. Under ownership unbundling, investment incentives are lower but there is never foreclosure of the entrant since this would worsen double marginalisation. When the network operator is subject to a break-even regulation, the investment incentives are crowded out under legal and ownership unbundling whereas they remain nearly unchanged under vertical integration. Welfare and consumer surplus decrease under legal unbundling, but increase under the two other regimes.
	Keywords: Vertical Integration, Investment, Foreclosure, Regulation JEL-Code:D2, D4, L43, L51, L92

Christian M. Bender and Georg Götz
Coexistence of service- and facility-based competition: The relevance of access prices for "make-or-buy"-decisions

	This draft: July 2010
	Abstract: This paper models competition between two firms, which provide broadband Internet access in regional markets with different population densities. The firms, an incumbent and an entrant, differ in two ways. First, consumers bear costs when switching to the entrant. Second, the entrant faces a make-or-buy decision in each region and can choose between service-based and facility-based entry. The usual trade-off between static and dynamic efficiency does not apply in the sense that higher access fees might yield both, lower retail prices and higher total coverage. This holds despite a strategic effect in the entrant's investment decision. While investment lowers marginal costs in regions with facility-based entry, it intensifies competition in all regions. We show that the cost-reducing potential of investments dominates the strategic effect: Higher access fees increase facility-based competition, decrease retail prices and increase total demand.
	Keywords: Broadband access markets, facility- and service-based entry, investments, economies of density, switching costs JEL-Code: D43, L13, L96

Paha, Johannes
Simulation and Prosecution of a Cartel with Endogenous Cartel Formation

	This draft: March 2010
	Abstract: In many cases, collusive agreements are formed by asymmetric firms and include only a subset of the firms active in the cartelized industry. This paper endogenizes the process of cartel formation in a numeric simulation model where firms differ in marginal costs and production technologies. The paper models the incentive to collude in a differentiated products Bertrand-oligopoly. Cartels are the outcomes of a dynamic formation game in mixed strategies. I find that the Nash-equilibrium of this complex game can be obtained efficiently by a differential Evolution stochastic optimization algorithm. It turns out that large firms have a higher probability to collude than small firms. Since firms' characteristics evolve over time, the simulation is used to generate data of costs, prices, output-quantities, and profits. This data forms the basis for an evaluation of empirical methods used in the detection of cartels.
	Keywords: Collusion, Cartel Detection, Cartel Formation, Differential Evolution, Heuristic Optimization, Industry Simulation JEL-Code: C51, C69, C72, D43, L12, L13, L40

Paha, Johannes
Using Accounting Data in Cartel Damage Calculations – Blessing or Menace?

	This draft: June 2009
	Abstract: Standard methods for calculating cartel-damages rely on data of prices charged and quantity sold. Such data may not easily be available. In this paper, it is shown that a lower bound for cartel-damages can also be computed from accounting data. In previous literature it is shown that economic profits can hardly be inferred from accounting data. Therefore, it is shown under which econometrically testable assumptions on accounting costs a meaningful lower bound for cartel damages can consistently be estimated from accounting data. An estimation of cartel-damages is performed for four vitamins producers that participated in the vitamins cartel. The results indicate that both the aggregation-level and the publication-frequency of accounting data pose a challenge to the estimation of cartel damages. A further challenge is to appropriately reflect the strength respectively effectiveness of the collusive agreement in the specification of any such estimation.
	JEL-Code: C22, L12, L13, L41

Götz, Georg
Competition, Regulation, and Broadband Access to the Internet

	This draft: February 2009
	Abstract: This paper reexamines the effect of the regulatory regime on both penetration and coverage of broadband access to the internet. The framework also allows for an evaluation of different public policy measures such as subsidization of broadband demand and supply. A welfare analysis asks what the optimal regulatory regime is and whether and how high-speed access to the internet should be subsidized. Using an approach similar to Valletti et al. (2002), the paper highlights the importance of population density for whether firms invest to provide internet access. The analysis reveals a trade-off between coverage and penetration.
	Keywords: Broadband, coverage, penetration, investment, population density JEL-Code: L 51, L 96, L12

Lyra, Marianna, Paha, Johannes, Paterlini, Sandra, and Winker, Peter
Optimization Heuristics for Determining Internal Rating Grading Scales

	Computational Statistics & Data Analysis, forthcoming
	Abstract: Basel II imposes regulatory capital on banks related to the default risk of their credit portfolio. Banks using an internal rating approach compute the regulatory capital from pooled probabilities of default. These pooled probabilities can be calculated by clustering credit borrowers into di®erent buckets and computing the mean PD for each bucket. The clustering problem can become very complex when Basel II regulations and real-world constraints are taken into account. Search heuristics have already proven remarkable performance in tackling this problem. A Threshold Accepting algorithm is proposed, which exploits the inherent discrete nature of the clustering problem. This algorithm is found to outperform alternative methodologies already proposed in the literature, such as standard k-means and Di®erential Evolution. Besides considering several clustering objectives for a given number of buckets, we extend the analysis further by introducing new methods to determine the optimal number of buckets in which to cluster banks' clients.
	Keywords: credit risk, probability of default, clustering, Threshold Accepting, Differential Evolution. JEL-Code: L 51, L 96, L12 [pdf Download Working Paper]

Götz, Georg, Briglauer, Wolfgang and Schwarz, Anton
Margin Squeeze in Fixed-Network Telephony Markets - competitive or anticompetitive?

	This draft: November 2008
	Abstract: This paper looks at the effects of different forms of wholesale and retail regulation on retail competition in fixed network telephony markets. We explicitly model two asymmetries between the incumbent operator and the entrant: (i) While the incumbent has zero marginal costs, the entrant has the wholesale access charge as (positive) marginal costs; (ii) While the incumbent is setting a two-part tariff at the retail level (fixed fee and calls price), the entrant can only set a linear price for calls. Competition from other infrastructures such as mobile telephony or cable is modelled as an ‘outside opportunity’ for consumers. We find that a horizontally differentiated entrant with market power may be subject to a margin squeeze due to double marginalization but will never be completely foreclosed. Entrants without market power might be subject to a margin squeeze if the wholesale access price is set at average costs and competitive pressure from other infrastructures increases. We argue that a wholesale price regulation at average costs is not optimal in such a situation and discuss retail minus and deregulation as potential alternatives.
	Keywords: access regulation, foreclosure, margin squeeze, telecommunications, fixed networks JEL-Code: L12, L41, L42, L50, L96

Götz, Georg and Hammerschidt, Anna
R&D cooperation with unit-elastic demand

	This Draft: January 2008 The final version is published in: Bulletin of Economic Research, 61(2), 179-188
	Abstract: This paper shows that R&D cooperation leads to the monopoly outcome in terms of price and quantity if demand is unit-elastic. If the demand function exhibits an upper bound for the willingness to pay, R&D cooperation is inferior to a scenario in which firms cooperate both in their R&D and their output decision.
	Keywords:R&D cooperation, spillovers, cartelization JEL-Code: L13, O31

Götz, Georg and Astebro, Thomas (University of Toronto)
Diffusion of new technology – The case of multiple generations

	This draft: December 2006
	Abstract: We model adoption decisions by competitive firms when successive generations of a new technology become available over time. Profit-maximizing firms choose which generation to adopt and at which adoption date. The model accounts for leapfrogging and simultaneous adoption of different generations. Leapfrogging occurs if a potential user does not adopt the state of the art technology but adopts the next generation. In the simultaneous adoption case some adopt the new generation while others still adopt an old generation. The two mentioned patterns are shown to be equilibrium outcomes that depend on exogenous parameters. Both overlap and leapfrogging may arise from the same parameters. As a consequence, firms of different sizes may adopt a generation at the same time. The model predicts that leapfroggers, who are the smallest firms in the industry, may well adopt the new generation before medium and large firms and that large firms are likely to adopt both generations. Empirical analysis on the adoption of two generations of machine tools (NC and CNC) by U.S. metalworking plants show that there is indeed substantial leapfrogging: 26% of all plants in the sample had adopted CNC but not NC by 1993. There was also overlap in adoption: 68% of the adopters of CNC adopted during 1981-1993; 53% of the adopters of NC adopted that technology during the same period. We find that the non-adopters of both technologies (NC and CNC) are the smallest, the adopters of NC but not CNC are on average larger, the leapfroggers are still larger and the largest plants, on average, adopt both technologies. Leapfroggers adopt CNC approximately one year earlier than adopters of both technologies. Empirical results are broadly consistent with model predictions.Keywords: Diffusion, Leapfrogging and CNC-machine tools
	Keywords: Diffusion, Leapfrogging and CNC-machine tools JEL-Code: L13, O31 and O33

Götz, Georg
Location, Technology, and Competitive Strategy

	This (preliminary) draft: February 2005 (This paper is a completely revised version of my paper Spatial Competition, Sequential Entry, and Technology Choice)
	Abstract: Strategic (capital) investments and the strategic choice of product characteristics are among the most important devices to manipulate market positions in a favorable way. This article examines optimum firm behavior as a function of cost parameters, market size, and barriers to entry. Synthesizing the economics and the business literature, it discusses under what conditions excessive entry deterrence, second-mover advantage as well as delegation of entry deterrence emerge in the same framework. The paper shows that both the number of firms and the equilibrium prices may be non-monotonic in market size. Larger markets may exhibit higher prices.
	Keywords: Hotelling model, entry deterrence, over-investment, under-investment, capital investment, strategic location choice JEL-Code: L11, L13 Accompanying files: The results of the simulation presented in the paper are available as a compressed (zip) Mathematica 3.0 notebook (size >900k) and as a PDF file (size 1 MB). If you do not have a license of Mathematica, you may view the (easier accessible) Mathematica file by installing the free MathReader at Wolfram Research, Inc.

Götz, Georg and Gugler, Klaus (University of Vienna)
Mergers and product variety under spatial competition: Evidence from retail gasoline

	This draft: August 2003
	Abstract: We show that for a spatially differentiated economy reduced product variety is the likely outcome of mergers except in cases where exit costs in relation to (outlet specific) fixed costs are high. Our empirical analysis of the Austrian retail gasoline market confirms that increases in concentration reduce product variety. Ignoring this product variety effect is likely to lead to an underestimate of market power in structural merger analysis.
	Keywords: spatial product differentiation, retail gasoline, mergers, concentration JEL-Code: L11, L13, L90

Götz, Georg
Endogenous Sequential Entry in a Spatial Model Revisited

	This draft: June 2004. A slightly changed version is published in the International Journal of Industrial Organization Volume 23, Issues 3-4 , April 2005, Pages 249-261.
	Abstract: This article reexamines sequential entry of firms in a Hotelling model of spatial product differentiation and corrects some results of Neven (1987). Contrary to Neven, I show that the pattern of locations is generally asymmetric in the case of a duopoly. Profits are non-monotonic in market size, even in the range where the number of firms does not change. The firm that bears the "burden" of entry deterrence gains from lower barriers to entry as long as entry deterrence is possible. Equilibrium profits of all firms may be larger in situations in which more firms are active.
	Keywords: Hotelling model, entry deterrence, strategic location choice JEL-Code: L11, L13 Accompanying files: The results of the simulation presented in the paper are available as a Mathematica notebook and as a PDF file. If you do not have a license of Mathematica, you may view the (easier accessible) Mathematica file by installing the free MathReader at Wolfram Research, Inc.

Götz, Georg, Elberfeld, Walter (University of Cologne) and Stähler, Frank (University of Kiel)
Vertical foreign direct investment, welfare, and employment

	This draft: August 2004. Published in Berkley Electronic Press: Topics in Economic Analysis & Policy 2005, Volume 5, Issue 1, Article 3.
	Abstract: This paper shows that vertical foreign direct investment will reduce prices but the aggregate welfare effect is unambiguously positive only under free market entry. Using a standard model of imperfect competition, we develop this result by considering two different cases. In the first case, the total number of firms is fixed, and we show that national and multinational firms may coexist. In the second case, we allow for market entry, and we focus on situations in which either only national or only multinational firms are active. Furthermore, we discuss impact effects on labor demand. We show that a decline in foreign wages increases domestic employment.
	Keywords: Vertical foreign direct investment, multinational enterprises, imperfect competition, welfare, labor demand. JEL-Code: F12, F15

Götz, Georg
Existence, Uniqueness, and Symmetry of Free-Entry Cournot Equilibrium: The Importance of Market Size and Technology Choice

	This draft: July 2004. A slightly changed and shortened version is pubished in the Journal of Institutional and Theoretical Economics 2005, Vol. 161, p. 503-521 under the title "Market Size, Technology Choice, and the Existence of Free-Entry Cournot Equilibrium". The file contains proofs (in particular of Proposition 1) and further discussions, which are not part of the published version.
	Abstract: This article adds technology choice to a free-entry Cournot model with linear demand and constant marginal costs. Firms can choose from a discrete set of technologies. This simple framework yields non-existence of equilibrium, existence of multiple equilibria and equilbria in which ex-ante identical firms choose different technologies, as possible outcomes. I provide a full characterization of the parameter sets for which these outcomes arise. The (non-)existence problem disappears if vertical market size is large. Non-existence is largely a 'small number' phenomenon. Asymmetric equilibria emerge either because of indivisibilities or due to similarity of different technologies in terms of the average costs realized.
	Keywords: Cournot equilibrium; existence; market size, heterogeneity; integer constraint JEL-Code:D43; L13

Götz, Georg
Spatial Competition, Sequential Entry, and Technology Choice

	This draft: April 2002.
	Abstract: This article introduces technology choice into a Hotelling model of spatial competition. This yields two entry deterrence devices, as well as complex strategic choices for the firms and a rich picture of industry structure. Depending on cost parameters and market size, firms may choose to over-invest or to under-invest. Industry structure is typically asymmetric either in terms of the locations chosen or the technologies used or in both. I find excessive entry deterrence, second mover advantage as well as delegation of entry deterrence. Both the number of firms and the equilibrium prices may be non-monotonic in market size. Larger markets may exhibit higher prices.
	Keywords: Hotelling model, entry deterrence, overinvestment, underinvestment JEL-Code: L11, L13 Accompanying files: The results of the simulation presented in the paper are available as a compressed (zip) Mathematica 3.0 notebook (size >900k) and as a PDF file (size 1 MB). If you do not have a license of Mathematica, you may view the (easier accessible) Mathematica file by installing the free MathReader at Wolfram Research, Inc.

Götz, Georg and Elberfeld, Walter ( University of Cologne)
Market size, technology choice, and market structure

	This draft: June 2001. German Economic Review, Vol. 3, 2002.
	Abstract: We introduce technology choice into a model of monopolistic competition and analyze the structural effects of changes in market size. A larger market leads to the adoption of a large scale technology. If a technology switch occurs, the number of firms decreases, and a rationalizing effect arises: individual and aggregate output increases; prices fall. This need not benefit consumers since a technology switch is associated with a decrease in product variety.
	Keywords: technology choice, monopolistic competition, shakeout, variable elasticity of substitution JEL-Code: L10

Götz, Georg
Sunk costs, windows of profit opportunities and the dynamics of entry

	This draft: January 2002. Published in: International Journal of Industrial Organization, 2002, Vol. 20, pp. 1409 -1436.
	Abstract: This paper adds two elements to a standard model of monopolistic competition: First, the number of potential entrants is limited in each period and increases only over time. Second, the potential entrants differ with respect to the consumers’ valuation of the variant they could offer. It is shown that the resulting simple model exhibits a rich dynamic structure covering cases like the product life cycle, a path dependent equilibrium and the traditional textbook case of entry. The welfare analysis confirms the view that you can’t have too much entry. Even entry of 'inefficient' firms improves welfare.
	Keywords: Industry evolution, product life cycle, path dependence JEL-Code: L10

Götz, Georg
Monopolistic competition and the diffusion of new technology

	This draft: October 1998 A slightly revised version has been published in The RAND Journal of Economics, Vol. 30, 1999, pp. 679-693.
	Abstract: This paper analyses the adoption and diffusion of new technology in a market for a differentiated product with monopolistic competition. It is shown that in a noncooperative equilibrium ex-ante identical firms adopt a new technology at different dates. This equilibrium can be described by a simple distribution function. For non-identical firms, the conditions are stated under which a positive relationship between firm size and speed of adoption exists. It is demonstrated that increased competition often promotes diffusion. Diffusion is shown to occur more slowly in the noncooperative solution than in a constrained social optimum.
	Keywords: Adoption, diffusion, monopolistic competition JEL-Code: O31 An older, more extensive and slightly different version from August 1997 is available here.

Götz, Georg
Strategic timing of adoption of new technologies under uncertainty: A note.

	This draft: March 1998 Published in: International Journal of Industrial Organization, Vol 18, 2000, pp. 369-379.
	Abstract: In this note the circumstances under which ex ante identical firms will choose different adoption dates are clarified. In particular, conditions under which ‘diffusion’ will arise in both open-loop and closed-loop games are identified. Furthermore, it is shown that the rents of nonidentical firms are not equalised, even if pre-emptive adoption is possible. Finally, an example is given in which the reduction of the uncertainty associated with the implementation of the new technology leads to a postponement of the adoption by the late adopter.
	Keywords: Adoption, diffusion, pre-emption, rent equalisation. JEL-Code: O31, O32