Jens Prüfer - Abstracts
"Search Engine Competition with Network Externalities" (with Cédric Argenton)
Abstract: The market for Internet search is not only economically and socially important, it is also highly concentrated. Is this a problem? We study the question whether it is true that "competition is only a free click away". We argue that the market for Internet search is characterized by data-driven indirect network externalities and construct a simple model of search engine competition, which produces a market share development that fits the empirically observed development since 2003 well. We find that there is a strong tendency towards market tipping and, subsequently, monopolization, with negative consequences on economic welfare. Therefore, we propose to require search engines to share their data on previous searches. We compare the resulting "competitive oligopoly" market structure with the less competitive current situation and show that our proposal would increase the rate of innovation, search quality, consumer surplus, and total welfare. We also discuss the practical feasibility of our policy proposal and sketch the legal issues involved.
"On the Evolution of Collective Enforcement Institutions: Communities and Courts" (with Scott Masten)
Abstract: Impersonal exchange has been a major driver of economic development. But transactors with no stake in maintaining an ongoing relationship have little incentive to honor deals. Therefore, all economies have developed institutions to support honest trade and realize the gains of impersonal exchange. We analyze the relative capacities of communities (or social networks) and courts to secure cooperation among heterogeneous, impersonal transactors. Our main finding is that communities and courts are complements: They support cooperation in different types of transactions. We apply our results to the rise and fall of a medieval enforcement institution, the Law Merchant, concluding that progressive reductions in the risks and costs of transportation over long distances, driven in part by improvements in shipbuilding methods, increased first the value and then the composition of long-distance trade in ways that initially favored and later undermined this institution.
"Democracy, Populism, and (Un)bounded Rationality" (with Johannes Binswanger)
Abstract: In this paper we aim to understand how bounded rationality affects outcomes in a democracy. We consider policy choice in a representative democracy when voters do not fully anticipate a politician's strategic behavior to manipulate his reelection chances. We find that this limited strategic sophistication of voters affects policy choice in a fundamental way. Under perfect sophistication, a politician does not make any use of his private information but completely panders to voters' opinions. In contrast, under limited sophistication, a politician makes some use of private information and panders only partially. Limited sophistication crucially determines how welfare under representative democracy compares to welfare under alternative political institutions such as direct democracy or governance by independent agents. We find that, if voters' sophistication is limited, representative democracy is preferable to the other institutions, from a perspective ``behind the veil of ignorance". Thus, this paper offers a novel explanation for the prevalence of representative democracy around the world.
Abstract: The process of innovation is driven by two main factors: new inventions and institutions supporting the transformation of inventions into marketable innovations. This paper proposes a new institution, called a semi-public competitions, that has been neglected by the economic literature but exists frequently in practice. I show how semi-public competitions can mitigate a dilemma that arises at an early stage of innovative activity and specify the conditions under which a semi-public competition can increase welfare. The results suggest that governments promote knowledge about the semi-public competition mechanism but refrain from direct public funding of contests.
"An Auction Market for Journal Articles" (with David Zetland)
Abstract: We recommend that an auction market replace the current system for submitting academic papers and show a strict Pareto-improvement in equilibrium. Besides the benefit of speed, this mechanism increases the average quality of articles and journals and rewards editors and referees for their effort. The "academic dollar" proceeds from papers sold at auction go to authors, editors and referees of cited articles. This nonpecuniary income indicates the academic impact of an article - facilitating decisions on tenure and promotion. This auction market does not require more work of editors.
Abstract: Should mergers among nonprofit organizations be assessed differently than mergers among for-profit firms? A recent debate in law and economics, boosted by apparently one-sided court decisions, has produced the result that promoting competition is socially valuable regardless of the particular objectives of producers. In this paper, I challenge the general validity of this result by showing that it may indeed depend on the particular objectives of producers whether a merger between two nonprofits is welfare decreasing or increasing. This implies that it is impossible to assess the net effects of a merger between two nonprofits without examining the objectives of the owners involved.
"Firms, Nonprofits, and Cooperatives: A Theory of Organizational Choice" (with Patrick Herbst)
Abstract: We formalize the difference between firms, nonprofits, and cooperatives and identify optimal organizational choice in a model of quality provision. Firms provide lowest and nonprofits highest levels of quality. Efficiency, however, depends on the competitive environment, the decision making process among owners and technology. Firms are optimal when decision making costs are high. Else, firms are increasingly dominated by either nonprofits or cooperatives (depending on the incremental costs of quality production). Increased competition improves relative efficiency of firms and decreases relative efficiency of nonprofits.
"Academic Faculty Governance and Recruitment Decisions" (with Uwe Walz)
Abstract: We analyze the implications of the governance structure in academic faculties for their recruitment decisions when competing for new researchers. The value to individual members through social interaction within the faculty depends on the average status of their fellow members. In recruitment decisions, existing members trade o ff the eff ect of entry on average status of the faculty against alternative uses of the recruitment budget if no entry takes place. We show that the best candidates join the best faculties but that they receive lower wages than some lower-ranking candidates. We argue that in a second-best world majority voting is a good approximation to maximizing aggregate faculty surplus. Our main policy implication is that consensus-based faculties, such as many in Europe, could improve the well-being of their members if they liberalized their internal decision making processes.
"Interconnection and Competition among Asymmetric Networks in the Internet Backbone Market" (with Eric Jahn)
Abstract:"We examine the interrelation between interconnection and competition in the Internet backbone market. Networks that are asymmetric in size choose among different interconnection regimes and compete for end-users. We show that a direct interconnection regime, peering, softens competition as compared to indirect interconnection since asymmetries become less influential when networks peer. If interconnection fees are paid, the smaller network pays the larger one. Sufficiently symmetric networks enter a Peering agreement while others use an intermediary network for exchanging traffic. This is in line with considerations of a non-U.S. policy maker. In contrast, U.S. policy makers prefer that relatively asymmetric networks peer."
Abstract: Currently, the Internet is characterised by excess capacity which benefits consumers and producers alike. High quality and declining prices of interconnection are the basis for many e-commerce, software and equipment businesses. However, tough competition in the Internet backbone market driving these developments could ruin network operators and, hence, threaten other markets, too. We pursue the idea of the Internet backbone market's decline with standard economic theory. We offer several scenarios and discuss potential market based and policy based remedies. We find that due to a phenomenon we call capacity paradox the industry's future development is overshadowed by "dark clouds".
"Why do Developers and Firms Contribute to the Production of Open Source Software?"
Abstract: In this article I explain why both software developers and firms contribute to Open Source Software (OSS). Existing economic theories either focus on the supply side (developers) or the demand side (firms) of OSS development. This paper is the first to explain both sides in one integrated model by understanding the OSS production process as an application contest to the network of prominent developers. Programmers contribute because they aim for reputation and fear being held up in private wage negotiations. Firms finance the process because they receive inside information on highly talented developers not yet known on the regular job market.
Global / English