IESE lunch seminar 13/11/07 Interconnection among Electronic Academic Journal Platforms 1...

IESE lunch seminar 13/11/07

Interconnection among Electronic Academic Journal Platforms

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Interconnection among Electronic Academic Journal Platforms: Multilateral versus Bilateral Interconnection

Doh-Shin Jeon (UPF, IESE (SP-SP),TSE)

Domenico Menicucci (Universita di Firenze)



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Some background about the market for academic journals

Move from print journals to electronic journals raises several fundamental issues:

(1) Move from ''no bundling and no discrimination'‘ to ''bundling and discrimination'': Jeon-Menicucci (JEEA, 2006)

(2) Open access journals: Jeon-Rochet (2007)

(3) Interconnection (=interoperability) : this paper



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Several public reports on the market for academic journals

UK House of Commons Science and Technology Committee (2004)

OECD (2005) Mathias Dewatripont etc. (2006)- Commissioned by EC- Section 9 is about interoperability



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“Interactive” electronic academic journals are much more than print journals

New technology for data and text mining, data and text linking (such as cross reference) etc. significantly increases the value added from interconnection among electronic journal platforms

- In biology, there is a software which can recognize a two-dimensional image of a molecule and search for all the articles studying the same molecule

- You can enhance the texts of an article by providing links to URLs or databases



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Future in biology

“One ultimate goal is “automatically generated knowledge layers” which will be overlaid on the electronic text and offer a quick route to connecting a paper with other relevant material – whether it is genes, proteins, metabolic markers etc.”

(Martin Hofmann, Frauhofer Institute of Algorithms and Scientific Computing)



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Anti-competitive issue

''... RE might try to undermine its competitors by denying them links with ScienceDirect, ...'‘

(U.K. Competition Commission (2001), p.22)



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CrossRef

A not-for-profit citation linking backbone offering a reference linking service that allows users to click on a citation and be taken directly to the target content.

A success story: It has more than 1,462 participating publishers and societies.

It allows publishers to avoid bilateral linking agreements: a single agreement with CrossRef serves as a linking agreement with all participating publishers



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Objective of this paper

To compare the multilateral interconnection regime à la CrossRef with a bilateral interconnection regime in terms of

(1) Incentive to interconnect

(2) Profits

(3) Welfare



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Main results

Publishers are fully interconnected under the multilateral interconnection regime but often partially interconnected under the bilateral one for exclusion or differentiation motives

If partial interconnection occurs for differentiation motive, exclusion of small publisher(s) occurs more often under the multilateral interconnection than under the bilateral one



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Literature review

Compatibility among networks: Katz-Shapiro (1985), Farrell and Saloner (1985, 1986)

Interconnection through two-way access pricing among telecommunication networks: Armstrong (1998) and Laffont-Rey-Tirole (1998a,b) etc

Interconnection among Internet Backbone companies (IBP): Crémer-Rey-Tirole (2000) and Laffont-Marcus-Rey-Tirole (2003)



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Our contribution to the literature

To study a multilateral interconnection and to compare it with a bilateral one.

Interconnection among academic journal platforms

Application to Interconnection among Internet Backbone Companies (IBP)



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Model

We build on Jeon-Menicucci (JEEA, 2006): Each publisher practices bundling

Players: 3 asymmetric profit-maximizing publishers and one representative library

3 games (1) m: Multilateral interconnection game à la

CrossRef(2) b: Billateral interconnection game à la

CrossRef(3) 0: game without interconnection



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Model

Multilateral Interconnection

Bilateral Interconnection

Sequential timing O O

Simultaneous timing O X



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Timing of m (Multilateral interconnection game à la CrossRef)

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5

1 decides to be active or not and, if active, x1=1 or x1=0



Each active i chooses Pi

The library chooses bundles to buy

Sequential Interconnection

Simultaenous pricing



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Timing of b (Bilateral interconnection game)


1 decides to be active or not and, if active, x1j=1 or x1j=0





Sequential Interconnection

SimultaneousPricing



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Timing of 0 (the game without interconnection)


1 decides to be active or not





Sequential decision to be active or not

SimultaneousPricing



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Interconnection

yij=1 (yij=0) : Platforms i and j are interconnected (not interconnected)

Under the multilateral interconnection regime: yij=1 iff xi=1 and xj=1

Under the bilateral interconnection regime: yij=1 iff xij=1 and xji=1

y=(y12,y13,y23)



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Publishers

Publisher i’s profit is Pi

The fixed cost of making the first copy of an article was already incurred.

Zero marginal cost of distribution. Zero cost of interconnection



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Library

Has a fixed budget M(>0) for journals Quasi-linear utility function Stand-alone utility from Bundle i:

U1>U2>U3>0 Additional utility from Interconnection

(economies of scale): I12>I13>I23>0 Utility from buying bundles 1 and 2:

U1+U2+I12y12-P1-P2



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Assumptions and a tie-breaking rule

Perfect information on utilities and budget M<U-I12 where UU1+U2+U3: implies that the

industry profit is equal to M A1: U1>U2+I23, U2>U3+I13 , U3>I12

Tie-breaking rule: A publisher is active only if it expects to have a strictly positive profit.



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One basic result (Lemma 1)

A1 implies that- If 3 is active, 1 and 2 are active- If 2 is active, 1 is active



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Pricing game given interconnection profile y

)(yM

M

21 UU

Only 1 can earn a positive profit equal to M

Only 1 and 2 can earn a positive profit. Their profits do not depend on y

All three earn a positive profit. Profits depend on y



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Duopoly prices

Determined by

They do not depend on interconnection profiles

MPP 21

2211 PUPU

),( 21DD PP



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Prices when all three compete: PiT(y)

Determined by

They depend on the interconnection profile: P1

T(y) increases with y12 and y13 and decreases with y23

3113133121121221 PPyIUUPPyIUU

3223233221121221 PPyIUUPPyIUU

321 PPPM



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0 (the game without interconnection)

MP *1

DD PPPP 2*

21*

1 ,

)0,0,0(M21 UU

A*={1} A*={1,2,3}A*={1,2}

)0,0,0(* Tii PP

M



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One basic result regarding incentive to interconnect

y=(y12,y13,y23)=(1,0,0) is the least favorable for 3.

If M>M(1,0,0), 3 makes a positive profit for any interconnection profile

Then, all publishers fully interconnect regardless of the mode of interconnection.

Question: What happens for MM(1,0,0)?



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m (Multilateral interconnection game à la CrossRef): Incentive to interconnects

(0,1,0) is the most favorable interconnection profile for 3 under m

If MM(0,1,0), 3 cannot make a positive profit for any possible y under m. Hence, we consider M>M(0,1,0).

Lemma 3: For each publisher, interconnection is a best response and sometimes the unique one.



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m (Multilateral interconnection game à la CrossRef): Equilibrium

0

)0,0,0(M

)0,0,0(* Tii PP

DD PPPP 2*

21*

1 ,

)1,1,1(M)0,1,0(M

A*={1,2,3}A*={1,2}

)1,1,1(* Tii PP

M

m

A*={1,2,3}A*={1,2}

DD PPPP 2*

21*

1 ,



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m (Multilateral interconnection game à la CrossRef): Intuition

More exclusion of 3 under m than under 0 becase of the economies of scale

Exclusion motive does not modify the incentive to interconnect

- If 1 chooses x1=0, 2 and 3 respond by x2=x3=1. Hence, x1=0 only worsens 1’s relative standing.



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b (Bilateral interconnection game): results

If MM(0,1,1), 3 cannot make a positive profit for any possible y under b. Hence, we consider M>M(0,1,1).

Main result: Partial interconnections may arise for two different motives, exclusion or differentiation motive

(1) Exclusion motive: If 1 and 2 are similar but 2 is much larger than 3, 1 or 2 excludes 3 by breaking connectivity with 3

(2) Differentiation motive: If 2 and 3 are similar but 1 is much larger than 3, 1 breaks connectivity with 2 but maintains connectivity with 3 in order to differentiate itself with respect to 2.



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Comparing 0, m and b

M(0,1,0) M(0,0,0) M(1,1,1) M(1,1,0)M

0A*={1,2} A*={1,2,3} & y*=(0,0,0)

A*={1,2}

A*={1,2,3} & y*=(0,1,1)

A*={1,2} A*={1,2,3} & y*=(1,1,1)

b when 4I23≥3I13

m

b when 3I13>2I12+4I23



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Social welfare

SW coincides with the library’s payoff. Under A1, SW is first determined by the

number of active publishers and then by the level of interconnection

As long as A* is the same, the multilateral regime is at least weakly the best.

Otherwise, no interconnection regime or the bilateral regime can be optimal



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Symmetric publishers with sequential interconnection

Under the multilateral interconnection regime, all publishers are active and fully interconnected

Under the bilateral regime

(1) If M<I, two possible outcomes in which either 2 or 3 is excluded.

(2) Otherwise, the unique equilibrium as in the multilateral regime



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Robustness: the multilateral interconnection

The outcome of the sequential interconnection game is equivalent to that of the simultaneous interconnection game

The results of both games extend to the case of any number of heterogeneous libraries



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Application to Interconnection among IBPs à la Crémer-Rey-Tirole (2000)

CRT consider the bilateral interconnection game through peering among 3 IBPs with the market shares in terms of the installed base

Differences between their model and ours:(i) Cournot (Market expansion) versus Salop(ii) Single-homing versus multi-homing They show under certain parameter conditions, 1

interconnects only with 2 to prevent 3 from gaining any new customer.

)4

1,

4

1,

2

1(),,( 321



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Application to Interconnection among IBPs à la Crémer-Rey-Tirole (2000)

Consider

There exists 1*>1/2 such that under the multilateral interconnection regime, all IBPs fully interconnect for any 1 1*.

)2

1,

2

1,(),,( 11

1321

1



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Conclusion

Interconnection (or interoperability) among different electronic platforms is a very important issue in general and in particular, in the case of academic journals.

The multilateral interconnection provides much stronger incentive to interconnect than the bilateral one

Our insight can be applied to Interconnection among Internet Backbone companies.

A surprising result is that exclusion may occur more often under the multilateral regime than under the bilateral regime and hence SW may be higher under the latter

A general message: Allowing firms to have finer instruments to discriminate makes interconnection more difficult than banning the discrimination (Jeon, Laffont, Tirole, RJE, 2005)

IESE lunch seminar 13/11/07 Interconnection among Electronic Academic Journal Platforms 1...

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