ESSAYS IN THE ECONOMICS OF NETWORKS

Transcription

1 ESSYS IN THE ECONOMICS OF NETWORKS y MIRCE ION MRCU DISSERTTION PRESENTED TO THE GRDUTE SCHOOL OF THE UNIVERSITY OF FLORID IN PRTIL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY UNIVERSITY OF FLORID 2008

2 2008 Micea Ioa Macu 2

3 To my family 3

4 CKNOWLEDGMENTS I thak my supevisoy commtee David Sappigto, Chuog i, Safod eg, ad James Seale fo thei pompt expet advice, fo thei patiece ad gaciousess i guidig me. I have leaed a geat deal fom them ad my othe pofessos, but also fom my colleagues ad fieds wh whom I have cossed hudles, shaed ideas ad laughs, ad who iiated me o thei cultue ad tadios. I would ot be hee whout the help of Lucetia ad Mihai, my mothe ad fathe i law. My godpaets Zoica ad Mihai, ad my bothe i law Nelu have povided ecouagemet ad made me laugh whe I eeded to. They ae always o my mid. Most of all I thak my wife Mihaela, my paets Ildi ad Micea, ad my siste Ligia who have bee by my side all these yeas. Whout thei sacifices, love, ad costat suppot this would ot have bee possible. I eve had to ask, ad I eve had a bette oppotuy to thak them. They ae the ispiatio fo who oe day I would like to become. While I hope to be able to epay all these special people, is likely as oe of my pofessos said that I will eve be able to do so fully. ut, as that same wise pofesso told me, the impotat thig is to emembe what othes have doe fo us, ad do the same fo those who follow i ou footsteps. 4

5 TLE OF CONTENTS CKNOWLEDGMENTS...4 LIST OF TLES...7 LIST OF FIGURES...8 LIST OF REVITIONS...9 STRCT...0 CHPTER INTRODUCTION THE DIFFUSION OF MOILE COMMUNICTIONS IN COUNTRIES IN TRNSITION...6 page Itoductio...6 Modelig Mobile Techology Diffusio...9 The Numbe of Potetial doptes...20 The Timig Locatio Paamete...22 The Speed Gowth Paamete...22 Empiical Specificatio ad Data Desciptio...25 Estimatio Results...29 Coclusio N EMPIRICL NLYSIS OF FIXED ND MOILE RODND DIFFUSION...42 Itoductio...42 Leatue Review...44 Empiical Studies o Global Fixed oadbad Diffusio...45 Empiical Studies o Global Mobile Diffusio...45 The Model, Method, ad Data...47 Fixed oadbad...47 Mobile oadbad...49 Results ad alysis...5 Fixed oadbad...5 Mobile oadbad...54 Cocludig Remaks

6 4 QULITY PROVISION IN TWO-SIDED MRKETS: THE CSE OF MNGED CRE...72 Itoductio...72 The Model...75 Patiets Decisio Makig...77 Physicias Decisio Makig...79 Pof Maximizatio...79 Iso-Elastic Distibutios of Health Risk ad Cost...84 Poposio. Chages i the Magial Utily of Qualy ad the Extealy Exeted by Doctos o Patiets...86 Poposio 2. Chages i the Distibutio of Teatmet Costs...87 Poposio 3. Chages i the MCO s Cost of Povidig Qualy...88 Poposio 4. Chages i the Distibutio of Health Risks...89 Poposio 5. Magude of Chages Due to Iceased Populatio Health Risk ad Magial Cost of Qualy...89 Poposio 6. Chages i the Numbe of Doctos i the Maket...90 Poposio 7. Chages i the Maximum Cost of Teatmet...9 Coclusio...9 PPENDIX EXPLNTORY ND INSTRUMENTL VRILES USED IN CHPTER 2, THEIR SOURCES, ND THE ESTIMTION METHOD...94 Defiio of Explaatoy Vaiables ad Data Souces...94 Istumetal Vaiable Defiios ad Ratioale fo Usig Them...95 Istumetal Vaiables Estimatio...96 DERIVTION OF THE MIN RESULTS IN CHPTER Iso-elastic Distibutios of Health Risk ad Teatmet Cost...97 Deivatio of the Pof Maximizig Solutio...97 Sufficiet Codios fo Pof Maximizatio...99 Poof of Poposio. Chages i the Magial Utily of Qualy ad the Extealy Exeted by Doctos o Patiets...02 Poof of Poposio 2. Chages i the Distibutio of Teatmet Costs...04 Poof of Poposio 3. Chages i the Cost of Povidig Qualy...04 Poof of Poposio 4. Chages i the Distibutio of Health Risks...05 Poof of Poposio 5. Magude of Chages Due to Iceased Populatio Health Risk ad Magial Cost of Qualy...06 Poof of Poposio 6. Chages i the Numbe of Doctos i the Maket...08 Poof of poposio 7. Chages i the Maximum Cost of Teatmet...08 LIST OF REFERENCES... IOGRPHICL SKETCH...7 6

7 LIST OF TLES Table page 2- Numbe of digal mobile opeatos Fome socialist couties: desciptive statistics Empiical aalysis of mobile telecommuicatios diffusio: diffeet factios of potetial adoptes fo each goup Empiical aalysis of mobile telecommuicatios diffusio: commo factio of potetial adoptes fo all goups Cumulative effect o cellula peetatio of a oe stadad deviatio icease i socioecoomic chaacteistics, o a 0 to chage i the dummy vaiables of eest oadbad peetatio ate top 5 OECD couties, by techology, Decembe Mobile boadbad 3G Mobile peetatio top 5 OECD couties, Mai empiical studies of fixed ad mobile boadbad diffusio Vaiables, measuemet ad data souces fo statistical aalysis fixed boadbad Vaiables, measuemet ad data souces fo statistical aalysis mobile boadbad Logistic egessios of boadbad peetatio Sample coelatio matix of vaiables used i mobile boadbad aalysis Liea egessios of mobile boadbad peetatio The effect of paamete iceases o maaged cae eimbusemet, ualy, umbe of doctos, magial health isk, ad isuace pemium...0 7

8 LIST OF FIGURES Figue page 2- Evolutio of cellula peetatio ates i the Czech Republic ad Estoia Cable-modem boadbad subscibes pe capa i the Ued States DSL subscibes pe capa i the Ued States Cable-modem boadbad subscibes pe capa i Japa DSL subscibes pe capa i Japa...7 8

9 LIST OF REVITIONS DSL FO FTTH GDP ITU MCO OECD PC USD W WDI Digal Subscibe Lie Food ad gicultue Ogaizatio Fibe To The Home Goss Domestic Poduct Iteatioal Telecommuicatios Uio Maaged Cae Ogaizatio Ogaizatio fo Ecoomic Coopeatio ad Developmet Pesoal Compute Ued States Dolla Wold ak Wold Developmet Idicatos 9

10 Chai: David E. M. Sappigto Majo: Ecoomics bstact of Dissetatio Peseted to the Gaduate School of the Uivesy of Floida i Patial Fulfillmet of the Reuiemets fo the Degee of Docto of Philosophy ESSYS IN THE ECONOMICS OF NETWORKS y Micea Ioa Macu Decembe 2008 I coducted thee studies i the ecoomics of etwoks. I the fist study I estimate a logistic model of mobile commuicatios diffusio to examie the impact of competio o cellula peetatio i fome socialist couties i Easte Euope ad Cetal sia. I fid that digal techology ad the oductio of competio iceased the speed of diffusio of mobile commuicatios. Couties had to choose whethe to awad moe liceses fom the begiig, o delay competio ad awad digal mobile liceses seuetially. Seuetial ety had a geate impact tha simultaeous ety, compesatig fo the delay i the oductio of competio. Lage ad iche couties oduced competio ealie, ad teded to awad moe tha oe digal mobile licese iially. Failue to accout fo this selectivy leads to upwad biased estimates of the effect of competio o cellula peetatio. oadbad commuicatios lie at the heat of the developig ifomatio society. I the secod study I aalyze the factos that ifluece the diffusio of fixed ad mobile boadbad. Usig OECD data, the logest available pael to date, we fid that local loop ubudlig, PC peetatio, populatio desy, ad Iteet cotet ae all associated wh highe fixed boadbad diffusio. Platfom competio is a sigificat dive of cable modem boadbad, but ot DSL diffusio. Multiple stadads policy, mobile applicatio pice, ad 0

11 populatio desy ifluece the diffusio of mobile boadbad. We also fid that fixed boadbad is ehe a complemet o a substute fo mobile boadbad yet. Recet developmets i the ecoomics of etwoks have show the potetial fallacies of usig oe-sided logic i two-sided makets. I the thid study I develop a two-sided maket model to aalyze the picig ad ualy decisios of a pof maximizig maaged cae ogaizatio MCO i the pesece of idiect etwok extealies betwee doctos ad patiets. The maaged cae ogaizatio faces tade-offs whe choosig the ualy of sevice, isuace pemiums, ad physicia eimbusemets. These tade-offs deped o patiet health isk ad physicia cost distibutios, the elasticy of supply of physicias wh espect to eimbusemets, the magial cost of sevice ualy, ad the magial utily deived by patiets fom access to a boade etwok of physicias ad the ualy of health sevices. I the case of iso-elastic distibutios of patiet health isk ad physicia cost of teatmet, a icease i the cost of povidig ualy deceases the ualy povided by the MCO, which leads to fewe policyholdes, lowe physicia eimbusemets, ad fewe doctos i the pefeed etwok. The isuace pemium also deceases. icease i the health isk of the populatio esults i lowe ualy, lowe eimbusemets, ad fewe physicias i the MCO s etwok. The isuace pemium also deceases, but the decease is smalle tha the decease i idividuals utily due to lowe ualy ad fewe physicias, which leads to fewe policyholdes.

12 CHPTER INTRODUCTION I coduct thee studies. Study is The Diffusio of Mobile Commuicatios i Couties i Tasio, study 2 is Empiical alysis of Fixed ad Mobile oadbad Diffusio, ad study 3 is Qualy Povisio i Two-sided Makets: the Case of Maaged Cae. Studies ad 2 ae empiical studies of diffusio of ew techologies i which etwok extealies play a impotat ole. They ae theefoe methodologically simila i that they ae based o the oliea, logistic model of techology diffusio. Study 3 is also coceed wh etwok extealies, oly this time i the case of etwoks of doctos ad patiets. I the fist study I aalyze the diffusio of mobile commuicatios i couties i tasio. These ae fome socialist couties i Easte Euope ad Cetal sia. I estimate a logistic model of diffusio to examie the ole of socio-ecoomic chaacteistics ad the impact of competio o cellula peetatio i these couties. I use a caefully costucted set of istumetal vaiables specific fo ecoomies i tasio to impove upo existig studies by addessig the edogeous atue of the elatioship betwee wielie ad wieless commuicatios. Moe impotatly, I take o accout the fact that couties may self-select whe makig key decisios such as the timig of the oductio of competio, o the atue of competio simultaeous vesus seuetial. If, fo example, couties that oduced competio ealie ae also those that would have beefed the most fom doig so, the simple least suaes techiues would ovestate the effect of competio o the speed of cellula commuicatios adoptio. Simultaeous competio efes to the ety of two o moe digal mobile commuicatios opeatos duig the fist caleda yea of digal mobile commuicatios pesece i a couty. Seuetial competio efes to ety occuig duig a subseuet caleda yea, afte oly oe digal cellula commuicatios povide was iially peset i the maket. 2

13 I fid that the oductio of competio acceleated the ates of cellula adoptio sigificatly. Seuetial ety had a moe poouced impact tha simultaeous ety, compesatig fo the delay i the oductio of competio, pehaps though moe aggessive picig by late etats i ode to establish themselves i the maket. s expected, the level of adoptio was sigificatly lowe duig the aalog ea due to capacy costas ad elatively high pices. Couties wh a highe icome pe capa had moe cellula subscibes iially, but this advatage declied ove time as mobile sevices became less expesive. Couties wh a highe umbe of fixed lies pe capa expeieced lowe iial levels of cellula adoptio, but highe subseuet gowth. The highe speed of adoptio could be the esult of supply iceases due to iceased ivaly betwee the two techologies. lteatively, could be that the two techologies ae ot ivalous ad posive diect etwok effects domiate. Shotages wee commo i socialism. sigificat factio of the populatio could ot get access to telecommuicatios sevices. Couties wh a highe factio of people waig fo a fixed lie coectio had a lowe iial umbe of mobile subscibes, but faste subseuet gowth. The secod study examies the diffusio of fixed ad mobile boadbad. It is jo wok wh Sagwo Lee fom the Depatmet of Joualism ad Commuicatios. oadbad commuicatios play a extemely impotat ole i the developig of the ifomatio society. Widespead boadbad diffusio ecouages iovatio, cotibutes to poductivy ad gowth, ad attacts foeig ivestmet. Thee is a gowig body of leatue o fixed boadbad diffusio, but thee ae still vey few coss-cultual empiical studies examiig the impotat ifluetial factos of global 3

14 boadbad diffusio. Results ae ot always cosistet, ad isufficiet data has peveted pevious studies fom captuig the oliea atue of boadbad diffusio. I addio, i spe of s sigificace ad implicatios, thee is o empiical study to ou kowledge about ifluetial factos of mobile boadbad diffusio because mobile boadbad deploymet bega oly i ecet yeas. Fo the same easo, we ae ot awae of ay study that ivestigates whethe fixed boadbad is a complemet o a substute fo mobile boadbad. Usig OECD 2 data, the logest available pael to date, we estimate a logistic egessio to captue the oliea atue ad examie the ifluetial factos of fixed boadbad diffusio. We fid that local loop ubudlig, PC 3 peetatio, populatio desy, ad Iteet cotet all ifluece boadbad diffusio. Platfom competio is a sigificat dive of cable modem boadbad, but ot DSL diffusio. alyzig data fom 2005 fo a coss-sectio of 5 couties we also fid that multiple stadads policy, mobile applicatio pice, ad populatio desy ifluece the diffusio of mobile boadbad. Ou esults idicate that fixed boadbad is ehe a complemet o a substute fo mobile boadbad yet. Study 3 exteds the leatue o two-sided makets by developig a two-sided platfom model of maaged cae ogaizatios MCOs that fo the fist time aalyzes the ualy of sevice povided by the emediay platfom, ot just s picig decisios. This is also oe of the fist studies to apply the theoy of two-sided makets to health cae ogaizatios. The mai featue of two-sided makets is the pesece of two-way idiect extealies betwee paticipats o diffeet sides of a emediay platfom, usually buyes ad selles. 2 Ogaizatio fo Ecoomic Coopeatio ad Developmet. 3 Pesoal Compute 4

15 Patiets cae about the umbe of doctos i the MCO s pefeed etwok, while physicias cae about the umbe of patiets eolled i the MCO ad thei health isk. I fid that isuace pemiums, physicia eimbusemets, ad the ualy of maaged cae sevices eflect the magude of the idiect extealies. Iceases i populatio health isk, such as those caused by populatio agig, lead to deceases i the MCO s ualy of sevice, physicia eimbusemets, ad umbe of doctos i the pefeed etwok. Iceases i the magial cost of ualy povisio also lead to lowe maaged cae ualy, physicia eimbusemets, ad umbe of doctos i the MCO s pefeed etwok. The magude of these chages depeds o the patiets pefeece fo ualy, the magude of the extealy exeted by doctos o patiets, the shape of the distibutio of health isks, ad the elasticy of the supply of physicias wh espect to eimbusemets. 5

16 CHPTER 2 THE DIFFUSION OF MOILE COMMUNICTIONS IN COUNTRIES IN TRNSITION Itoductio Recet studies suggest that a pioy fo developig couties seekig to catch up wh the developed wold is to develop thei ifastuctue apidly. 4 Give thei histoy of udeivestmet i telecommuicatios ad give the apid pace of techological chage i ecet decades, fome socialist couties i Easte Euope ad Cetal sia 5 have pobably moe to gai by ivestig i telecommuicatios tha i ay othe utily secto. Techological iovatio, i paticula the developmet of mobile commuicatios, has made possible fo these couties to make up fo time lost, ad develop thei commuicatios ifastuctue apidly ad at elatively low cost. Less tha fiftee yeas afte the fist of these fome socialist couties adopted mobile techology, the couties exhib a wide aay of cellula peetatio levels, agig fom less tha 0% i most fome Soviet Uio epublics to almost 85% i the Czech Republic at the ed of Duig this shot time spa, cellula peetatio has fa outgow fixed lie commuicatios i some of these couties. It seems impotat the to explai the success of leadig couties ad the iabily of othe couties to capalize o this oppotuy. Socioecoomic factos, such as the level of ecoomic developmet of each couty, cetaily played a impotat ole i detemiig the elative success of the couties. ut pat of the success may be due to govemet policies affectig the adoptio of cellula techology. These couties faced seveal impotat decisios, fom the adoptio of a paticula techological stadad to the timig ad umbe of mobile liceses awaded to poduces. 4 See Poot 2000 fo a sythesis of empiical eseach o the impact of govemet o log-u gowth, icludig the impact of public ifastuctue ivestmet. 5 I will heeafte efe to these couties as fome socialist couties o tasio couties. 6

17 mog these decisios, the oductio of competio ad the timig of liceses had a paticulaly impotat impact o the level ad speed of mobile commuicatio diffusio. 6 Thee ae vey few studies of mobile commuicatios diffusio. The most otable ae the studies by Pake ad Rölle [997] o the U.S. mobile telephoe idusty, ad those by Gube & Vebove [200a, b], oe focusig o the Euopea Uio membe couties, the othe oe moe extesive i coveage, icludig ove 50 developed ad developig couties. bstactig fom techological aspects ad the timig of fist liceses, Pake ad Rölle used a stuctual model to focus moe deeply o competio. They foud that the oductio of duopolies i U.S. states had a sigificat posive effect, though the effect was elatively small. Gube ad Vebove s fidigs ae that eal GDP pe capa, the size of the fixed telephoe etwok, ad the size of the waig list fo fixed lies ae all impotat detemiats of cellula diffusio. They also foud that competio, techological stadads, ad the oductio of digal techology played a impotat ole i acceleatig the diffusio of mobile commuicatios. The effect of competio was cosideably lage duig the digal ea, as the shap capacy icease bought about by digal techology made competio much moe effective. thid study by Gube [200] focused o 0 Cetal ad Easte Euopea couties, out of the 9 tasio couties that ae aalyzed i this pape. While this study also foud a posive impact of competio o cellula peetatio, did ot fid a sigificat effect of digal techology ad eal GDP pe capa o mobile commuicatios diffusio. s Gube himself adms, these esults ae puzzlig i light of covetioal wisdom ad his jo wok wh Vebove. possible explaatio could be the small umbe of obsevatios oly 64. y 6 Wh vey few exceptios, the fome socialist couties adopted GSM as thei digal techological stadad. Theefoe, is ulikely that techological stadads cotibuted sigificatly to the diffeece i outcomes betwee couties. 7

18 997, the last yea i Gube s dataset, tasio couties had elatively limed mobile commuicatios expeiece, especially wh digal techology. cosideable umbe of yeas have passed sice the ad a ew empiical ivestigatio of cellula commuicatios diffusio i tasio couties is waated. I aalyze the diffusio of mobile commuicatios i 9 out of the 27 fome socialist couties i Easte Euope ad Cetal sia fom 990 to The peset study employs a caefully costucted set of istumetal vaiables specific fo ecoomies i tasio to impove upo existig studies by addessig the edogeous atue of the elatioship betwee wielie ad wieless commuicatios. Moe impotatly, takes o accout the fact that couties may self-select whe makig key decisios such as the timig of the oductio of competio, o the atue of competio simultaeous vesus seuetial. 7 If, fo example, couties that oduced competio ealie ae also those that would have beefed the most fom doig so, the simple least suaes techiues would ovestate the effect of competio o the speed of cellula commuicatios adoptio. I fid that the oductio of competio acceleated ates of cellula adoptio sigificatly. Seuetial competio had a moe poouced impact tha simultaeous competio, pehaps due to moe aggessive picig by late etats i ode to establish themselves i the maket. s expected, the level of adoptio was sigificatly lowe duig the aalog ea due to capacy costas ad elatively high pices. Couties wh a highe icome pe capa had moe cellula subscibes iially, but this advatage declied ove time as mobile sevices became less expesive. Couties wh a highe umbe of fixed lies pe capa 7 Fo the puposes of this study, simultaeous competio meas the ety of two o moe digal mobile commuicatios opeatos duig the fist caleda yea of digal mobile commuicatios pesece i a couty. Seuetial competio efes to ety occuig duig a subseuet caleda yea, afte oly oe digal cellula commuicatios povide was iially peset i the maket. Due to capacy limatios, oe of the fome socialist couties oduced competio duig the aalog ea, wh the possible exceptio of Russia, which was excluded fom the aalysis due to s elative size compaed to all othe couties i the egio. 8

19 expeieced lowe iial levels of cellula adoptio, but highe subseuet gowth. The highe speed of adoptio could be the esult of supply iceases due to iceased ivaly betwee the two techologies. lteatively, could be that the two techologies ae ot ivalous ad posive diect etwok effects domiate. Couties wh a highe factio of people waig fo a fixed lie coectio had a lowe iial umbe of subscibes, but faste subseuet gowth. The est of the pape poceeds as follows. Sectio 2 pesets the logistic model of cellula techology diffusio employed. Sectio 3 pesets the data ad the empiical specificatio. Sectio 4 pesets ad discusses the esults. Sectio 5 cocludes. Modelig Mobile Techology Diffusio Whe aalyzig the adoptio of ew techologies, is essetial to accout explicly fo the pevailig stages of adoptio Dekimpe et al. [998]. Fo a vaiety of cultual ad socioecoomic easos, some couties adopt ew techologies ealie tha othes. If leadig couties ae also the oes to fist adopt cetai policy decisios, such as the oductio of competio, the a simple coss sectio aalysis would iappopiately attibute the highe level of cellula peetatio i ealy adoptig couties to the implemetatio of the espective policy decisio. Followig Gube ad Vebove [200b], I use a logistic fuctio to model the diffusio of mobile techology i ode to accout fo s dyamic atue. The logistic specificatio is appealig because povides a meas of captuig the existece of etwok extealies i mobile telephoy. The flow of ew adoptes is elated to the stock of existig subscibes i a way simila to that of epidemic models. Iially, the flow of adoptes is small. s the stock of cellula subscibes iceases, moe ad moe people adopt the techology, leadig to a expoetial icease i the umbe of adoptes. Howeve, the flow of subscibes declies as the stock appoaches the total umbe of potetial adoptes i the maket. Ove time, the diffusio of 9

20 the ew techology thus follows the classic S shaped patte. The logistic specificatio appeas to appoximate well the actual evolutio of cellula peetatio ates, as ca be see fom Figue 2- depictig the evolutio of cellula peetatio ates i the Czech Republic ad Estoia, two of the most advaced tasio couties i tems of cellula peetatio see appedix. Lettig y deote the total umbe of idividuals i couty i that adopted cellula techology by time t, ad lettig logistic diffusio euatio is * y deote the total umbe of potetial adoptes, the stadad y * y exp a b t, 2- whee a ad b ae paametes, as discussed below. The shape of this fuctio is detemied by thee elemets: the umbe of potetial adoptes, the timig of iial adoptio, ad the speed of adoptio. The Numbe of Potetial doptes Not all idividuals i a couty adopt a ew techology, such as mobile telephoy. Regadless of how iexpesive mobile telephoy might become, some idividuals eve choose to cosume the sevice. The total umbe of potetial adoptes as a factio γ i of total populatio POP * y i a couty may be specified y * γ POP. 2-2 i This factio vaies wh icome, pices, the factio of uba populatio, ad othe couty chaacteistics. 8 I pactice, the estimatio of the umbe of potetial adoptes poses sigificat poblems. I piciple, this potetial could be estimated as a fixed effect fo each 8 Ufotuately, as i othe studies, eliable data o the pice of mobile sevices is ot available fo my sample. 20

21 couty. Howeve, most fome socialist couties wee i thei ealy stages of cellula adoptio thoughout the 990s. Theefoe, thee ae isufficiet obsevatios to estimate cosistetly the potetial umbe of adoptes i each couty. 9 solutio to this poblem is to pool the data ad estimate a commo factio of potetial adoptes fo a goup of couties, exploig the fact that diffeet couties ae i diffeet stages of adoptio. I estimate the commo factio of potetial adoptes fo all couties fom Euatio 2- usig oliea least suaes, afte addig a mea zeo distubace tem, whout icludig couty chaacteistics i the estimatio. 0, Oce estimated, I teat the factio of potetial adoptes as a kow paamete, as i Dekimpe et al. 2 Thee is cosideable heteogeey i socioecoomic chaacteistics eve betwee fome socialist couties i my sample. To accout fo this heteogeey, I futhe divided the couties o fou goups, ad allowed each goup to have a diffeet factio of potetial adoptes. Couties wee divided o goups based o geogaphic ad histoical cosideatios i ode to educe as much as possible the heteogeey due to both obsevable ad uobsevable factos. 3 The fou goups ae: the altic States, the othe fome membes of the 9 The difficulty i estimatig the factio of potetial adoptes is ot a poblem oly i this study. y the time eseaches have eough obsevatios to estimate the potetial of a maket, that potetial is typically well kow, ad estimatios ae of limed impotace. 0 This is also the appoach i Gube ad Vebove 200a, justified by the elative homogeey of the Euopea Uio membe couties they aalyzed. Regessios i which the factio of potetial subscibes vaies liealy wh the eal GDP pe capa ad the factio of people i each couty livig i uba aeas poduced ueasoable esults fo some couties, such as egative factios of potetial adoptes. This esult might eflect the absece of data o the pice of mobile sevices. 2 Dekimpe et al. [998] suggest that paametes of adoptio euatios ca be estimated seuetially istead of simultaeously. They teat the total umbe of potetial adoptes as a kow paamete. Thei decisio is based upo idusty eviews. They defie the total umbe of potetial adoptes i each couty as the pecetage of leate people livig i uba aeas ad havig sufficiet icome to affod basic telephoe sevice. 3 Koceda 200, ad Kuta ad Yig 2004 use a simila divisio of these couties based o geogaphical ad istutioal cosedeatios ad fid evidece of covegece i macoecoomic fudametals whi goups. 2

22 Commowealth of Idepedet Sates CIS, the alkas, ad couties i Cetal Euope CE. list of couties i each goup is peseted i Table 2-. Iteestigly, this geogaphicalhistoical divisio captues most of the heteogeey i the levels of adoptio eached by couties at the ed of The Timig Locatio Paamete The paamete a i Euatio 2- idicates the lag lead i adoptig the ew techology. It detemies the iial level of adoptio. 4 posive value shifts the S shaped fuctio upwads while a egative oe shifts dowwads, whout modifyig the S-shape. The Speed Gowth Paamete The paamete b i Euatio 2- measues the speed of diffusio. Diffeetiatig Euatio 2- wh espect to time povides dy dt y * y y b. 2-3 * y Euatio 2-3 shows that b is eual to the gowth ate i the umbe of adoptes, elative to the factio of potetial subscibes who have ot yet adopted the techology. The secod y deivative is posive fo y < * 2 y, ad egative fo y > * 2. 5 The umbe of adoptes thus follows a symmetic S-shaped patte, the maximum speed beig eached whe half of the total umbe of potetial subscibes has adopted the ew techology. y * y as t e 4 Note that 0 a. 2 d y 5 The secod deivative is 2 dt * * * 2 y y y 2y b y. y y * 22

23 The locatio ad gowth paametes ca be allowed to vay wh couty chaacteistics ad policy vaiables, as i Euatios 2-4 ad 2-5 J 0 j j a i D X j 2-4 J 0 j j b i D X j The vaiables place at time fo t < j T i. 2-5 j D ae dummy vaiables captuig the effect of cetai evets j that take j T i i couty i the oductio of competio fo example. Thus j D euals zeo, ad euals oe fot. The vecto X icludes cotiuous vaiables affectig both j T i 0 0 the timig ad the speed of adoptio. The paametes i ad i ae couty-specific timig ad speed fixed effects. They captue diffeeces i the timig ad speed of adoptio due to couty chaacteistics that ae ot icluded i the model. ll paametes wh the exceptio of the speed ad timig couty fixed effects, ad 0, ae assumed to be the same fo all couties. 0 i i Followig Gube ad Vebove [200b], I allow evey evet to impact both the locatio ad gowth paametes. Howeve, I test the estictio that a evet j D does ot lead to a discotiuous jump o fall i the umbe of subscibes, ad impose the estictio fo the evets fo which I could ot eject. 6 Fo the estictio to hold, the umbe of subscibes immediately befoe the occuece of the evet should eual the umbe of subscibes immediately afte the evet occued. That is 6 I could ot eject the hypothesis that o discotiuy was caused by the oductio of competio. Imposig t j T i estictio 6 makes the effect at yeas fom the oductio of competio to be the same acoss couties. Howeve, the existece of discotiuies could ot be ejected fo the oductio of digal mobile commuicatios. This eflects the shap icease i capacy associated wh digal techology. 23

24 0 i 0 i k j k D j k k j 0 X k D k i k j i k D i k 0 j X X T k j k D j i k X T j i, 2-6 which simplifies to j j j Ti. 2-7 The evets fo which costa 2-7 holds imply oly a chage i the speed of adoptio. Let J deote the set of these evets, ad K deote the set of evets that lead ot oly to chages i the speed of adoptio, but also to discotiuies i the level of adoptio. Whe the potetial umbe of adoptes is kow, the followig tasfomatio which pems a simple liea fom of Euatio 2- is possible y l z a bt y y. 2-8 * The depedet vaiable, z, is the atual logahm of the factio of potetial adoptes that did ot adopt by time t, but that adopt at time t. Note that z ca be ewte i tems of cellula pe capa peetatio ates as z m l a bt i m γ, 2-9 whee y m is the pe capa mobile peetatio ate. Pop Substutig 4 o 7, ad accoutig fo estictio 6 povides z 0 0 j j j X X t D t T i i j J i k K k D k k K k D k t 2-0 Euatio 2-0 ca be estimated usig stadad least suaes dummy vaiables ad istumetal vaiables techiues by addig a mea zeo distubace tem. Restictio 2-7 ca be 24

25 j tested by icludig i Euatio 2-0, ad applyig stadad F ad t tests o the sigificace j of paametes. Oe estimatio coce is the elatively lage umbe of paametes that must be estimated, sice thee is both a locatio ad a gowth paamete fo each couty. ecause of the 0 lieay of 8, the locatio paametes i behave as stadad fixed effects i least suaes 0 dummy vaiables egessio. The gowth paametes i howeve will be icosistet uless the umbe of obsevatios fo each couty is sufficietly lage. To addess this issue, I use a appoach simila to the oe I used to estimate the umbe of potetial adoptes. I paticula, I am assumig that all couties whi a goup have the same locatio ad speed fixed effects. 7 The umbe of fixed effects to be estimated the is oly six, istead of thy-six, two less tha twice the umbe of couties. 8 Empiical Specificatio ad Data Desciptio The focus solely o fome socialist couties implies some limatios, but also povides some advatages. I paticula, the elative homogeey of these couties is well-sued fo the customay assumptio of commo paametes of eest acoss all couties. I aalyze 9 of the 27 fome socialist couties i Easte Euope ad Cetal sia betwee 990 ad Seveal couties wee excluded fom the aalysis because of missig data osia ad Hezegovia, elaus, Macedoia, Tajikista, Tukmeista, ad Yugoslavia. 9 Sloveia was excluded because had a much highe level of GDP pe capa tha all othe fome socialist 7 Gube ad Vebove [200b] addessed the same poblem by imposig patial o complete covegece i the level of adoptio betwee couties, thus estictig the speed paametes. 8 Sice we ae dealig wh dummy vaiables, the locatio ad gowth paametes of oe goup ae excluded to avoid multicolieay. The emaiig thee pais of estimated locatio ad gowth paametes epeset diffeeces i the iial level of adoptio ad the subseuet speed of adoptio elative to the excluded goup, that of Cetal Euopea couties. 9 Some of these couties expeieced amed coflicts duig the peiod of study. 25

26 couties, ad my empiical methodology pesumes homogeey betwee goups of couties. 20 Russia was excluded because is a outlie amog fome socialist couties both i tems of populatio ad lad aea. Russia ca be cosideed as havig seveal telecommuicatio makets. It would be iappopiate to assess the competiveess of these idividual makets based o aggegate data fo all of Russia. The level of adoptio ad speed of adoptio vay wh couty socioecoomic chaacteistics see Euatio 2-0. The couty chaacteistics icluded i X ae eal GDP pe capa expessed i costat 995 USD, the umbe of mailies pe capa, ad the atio betwee egisteed applicatios fo a fixed lie ad the umbe of mailies i sevice waig list. 2 Mailies ae fixed telephoe lies coectig the subscibe s temial euipmet to the public swched etwok. Thoughout the pape I use the tems mailies, fixed lies, ad wielies echageably. Desciptive statistics ae peseted i Table The aveage cellula peetatio ate at the ed of 2002 was 25.4%. I the shot time spa sice s oductio, mobile telephoy has supassed fixed telephoy i may of these couties. Fo compaiso, the aveage fixed lie peetatio ate at the ed of 2002 was oly 2.9%. Thee is howeve a wide discepacy i cellula peetatio levels. Most fome Soviet Uio Republics had cellula peetatio levels smalle tha 0%, compaed to almost 85% i the leadig couty, the Czech Republic. 20 Sloveia was the oly fome socialist couty to be classified i the high-icome categoy by the Iteatioal Telecommuicatios Uio duig this peiod. 2 The legth of the waig list is affected posively by umet demad, ad egatively by the fustatio of joiig a walist whout hope of eceivig sevice. Ideally, oe would also like to accout fo the effect of the aveage waig time fo the istallatio of a fixed lie o cellula peetatio. Howeve, data o aveage waig time is scace. 22 addioal measue of couties polical istabily poved isigificat i the estimatios. The measue is the polical costa vaiable POLCON V costucted by Heisz 2000 o the basis of a spatial model of polical eactio. 26

27 O the assumptio that mobile commuicatios is a omal good, couties wh highe pe capa icome should have a highe iial level of cellula peetatio, othe thigs eual. I theoy, fixed lie peetatio may have a posive o a egative effect o fixed etwok expasio, depedig whethe adoptes view mobile commuicatios as a complemet o a substute fo fixed commuicatios. The telecommuicatios maket i socialist couties has log bee chaacteized by sigificat excess demad fo fixed lies. The suatio pesisted eve afte the fall of commuism, as buildig commuicatios ifastuctue euied time ad a cosideable amout of ivestmet. Low ad ubalaced taiffs that favoed esidetial customes aggavated the poblem of excess demad fo wielie sevices. Oe would expect couties wh a highe factio of people waig fo the istallatio of a fixed lie to adopt cellula techology faste. Seveal couties stated adoptig cellula techology duig the aalog ea, befoe the advet of digal mobile commuicatios. Digal techology bought a shap icease i capacy ad i the umbe of cellula subscibes. I use a dummy vaiable NLOG to accout fo the possible diffeeces i the level ad speed of adoptio betwee the two techologies. addioal dummy vaiable SINGLE_D accouts fo the possibily that couties which oly adopted the digal techology may have a diffeet level ad speed of adoptio tha couties which stated wh aalog techology. Tests of estictio 2-7 o these vaiables ejected the hypothesis of o discotiuy. ll fome socialist couties i Easte Euope ad Cetal sia oduced competio i digal mobile commuicatios by the ed of 2002, wh the exceptio of meia, Macedoia 27

28 ad Tukmeista. Table 2- shows the umbe of digal cellula opeatos i each couty, ad the yeas whe these opeatos eteed the maket. 23 Moopolists typically fid pofable to aise pices ad estict output. The oductio of competio may lead to lowe pices, iceased demad fo mobile sevices, ad faste adoptio of cellula techology. ut competig fims might also collude ad keep pices high. Thee is ample theoetical leatue that stesses the ole ecoectio chages play i facilatig collusio betwee competig etwoks see mstog [998], Laffot, Rey, ad Tiole [998a, b] fo example. I the exteme case the pice fims chage could be the moopoly pice. Moe fims may also have moe esouces available fo ivestmet. ut moe esouces do ot ecessay mea moe ivestmet. ecause of demad ucetay, competig fims might fee ide o each othe s ifomatio gatheig, ad thus might wa a elatively log time to ivest mstog ad Vickes [996]. Whethe competio leads to faste cellula techology adoptio o ot is theefoe a empiical uestio. Pake ad Rölle [997] fid that duopolies i US mobile commuicatios makets behaved much less competively tha expected. Gube ad Vebove [200a, b] ad Gube [200] fid that the oductio of competio had a posive effect o the speed of adoptio of cellula techology. I use thee vaiables to captue the effect of competio o mobile commuicatios diffusio: a dummy vaiable fo the oductio of digal commuicatios competio COMPD, ad two othe dummy vaiables that make possible to compae the elative effect of oducig competio simultaeously SIMULTNEOUS vesus seuetially 23 The dates of ety eflect actual lauch dates fo the povisio of sevices, athe tha dates whe liceses wee awaded. Ety dates, as well as the umbe of subscibes of each compay, wee collected by the autho fom vaious issues of the Global Mobile ad Global Wieless publicatios. 28

29 SEQUENTIL. Tests of estictio 2-7 could ot eject the hypothesis of o discotiuy fo ay of the competio vaiables. aalysis of the pattes of ety i fome socialist couties eveals that iche couties ad moe populous couties oduced competio ealie tha smalle, pooe couties. Low iial demad fo mobile commuicatios i pooe ad less populous couties did ot allow moe tha oe pofable fim i the maket. Riche ad moe populous couties also teded to oduce competio simultaeously. It is impotat, theefoe, to accout fo the edogeey of such decisios, ad see if the effect of competio vaiables emais posive ad sigificat whe accoutig fo self-selectio o behalf of these couties. I estimate the model usig istumetal vaiables, afte addig a mea zeo eo tem to Euatio sigificat cotibutio of this pape is the use of a caefully costucted set of istumets specific fo tasio couties, icludig vaiables such as govemet expedue as a factio of GDP, ad the factio of bak assets held by state-owed baks. Details about the estimatig pocedue, data souces, the istumets used, ad the atioale fo usig them ae give i the appedix. Estimatio Results The esults fom estimatios i which the fou goups of couties wee allowed to have diffeet factios of potetial adoptes ae peseted i Table 2-3. The esults wee vey simila whe all goups wee assumed to have the same factio of potetial adoptes. They ae peseted i Table 2-4. The obustess of the esults wh espect to diffeet assumptios 24 Gube ad Vebove [200a, b], ad Gube [200] estimated thei models usig oliea least suaes. Howeve, the umbe of mai lies pe capa ad the factio of people o a waig list ae edogeous to cellula peetatio. Futhemoe, the oductio ad type of competio also appea to have bee edogeous decisios. Hausma test ejected the ull hypothesis of exogeey of these vaiables at % level of sigificace. 29

30 egadig the total umbe of potetial adoptes is comfotig ad helps validate the teatmet of the factios of potetial adoptes as kow paametes. The fist two colums i Table 2-3 peset esults i which mailies pe capa, the waig list, as well as all competio vaiables, wee istumeted. s expected, couties wh a highe level of icome pe capa had highe iial adoptio levels, all othe thigs eual. Howeve, thei advatage seems to dimiish ove time, pobably because of deceasig pices of mobile sevices. These fidigs ae i cotast wh those of Gube [200] who foud o effect of eal GDP pe capa o cellula peetatio ates i 0 tasio couties, but ae i accodace wh the esults of Gube ad Vebove [200a, b]. Couties wh highe wielie peetatio had fewe mobile subscibes pe capa iially, but had highe subseuet gowth. 25 This fidig may eflect the fact that fome socialist couties wee elatively poo i the ealy 990s, ad most people who owed a fixed lie did ot acuie mobile sevices. s pices declied, pehaps dive by supply iceases due to lowe costs ad iceased ivaly betwee the two techologies, moe people stated buyig mobile sevices. lteatively, the highe ate of gowth could be the esult of posive diect etwok effects betwee techologies. May customes i these couties bought pepaid phoe cads ad used mobile phoes oly as a meas of beig cotacted, athe tha to make calls. Most people who adopted cellula techology did ot give up thei fixed lies due to high taiffs fo mobile-to-fixed ad fixed-to-mobile calls. The elative povety of these couties could also explai the lowe iial level of adoptio i couties wh a highe factio of the populatio waig fo fixed lies. Geeally, people 25 This fidig is cotay to that of Gube ad Vebove 200b, who fid that couties wh highe fixed lie peetatio also had a highe iial factio of cellula subscibes. Howeve, the diffeece i esults is ot due to the diffeece i estimatig techiues betwee the two studies. I the peset study, least suaes dummy vaiables estimatio poduced the same ualative esults as istumetal vaiables. 30

31 waig fo mai lies had modest o ltle icome. 26 These people could ot affod a mobile phoe iially. Howeve, as pices deceased, these people stated to buy cellula phoes, ad couties wh moe people o waig lists expeieced elatively apid gowth i mobile adoptio. I cotast wh Gube [200], but i accodace wh Gube ad Vebove [200a, b], I fid that techological factos had a impotat impact o mobile techology diffusio. The level of adoptio was sigificatly lowe duig the aalog ea due to capacy costas ad elatively high pices. Couties that stated adoptig cellula commuicatios oly duig the digal ea had lowe iial levels of adoptio elative to couties that stated the adoptio wh aalog techology. Howeve, they also expeieced highe levels of gowth, as people who valued mobile commuicatios highly, ad would have bought the sevices had they bee available duig the aalog ea, bought the sevices whe digal mobile commuicatios wee oduced. The oductio of competio iceased the speed of adoptio of cellula techology. The effect is sigificat eve afte accoutig fo the edogeey of competio vaiables. 27 The effect was paticulaly poouced whe competio was oduced seuetially. 28 The geate impact of seuetial competio could eflect the fact that couties which oduced competio seuetially ofte oduced competio late tha couties which oduced 26 ibes wee ot ucommo i these couties. Rich o ifluet people did ot have to wa i lie fo a coectio. 27 s metioed peviously, cellula pices ae abset fom the estimatios, as data o cellula pices i these couties is vey scace. Nevetheless, pices of mobile phoes ad mobile calls have declied thoughout the 990s. To the extet that pice deceases ae due to competio, the absece of pices fom estimatios does ot lead to biased coefficiets. Howeve, if pice deceases ae also due to othe omted factos, the coefficiets of competio vaiables ae oveestimated. The use of fixed effects helps educe the possible bias due to omted vaiables. 28 The coefficiets o seuetial ad simultaeous competio i Table I ae statistically diffeet at 5% level of sigificace. 3

32 competio simultaeously. To the extet thee is a catchig up effect caused by techological pogess, deceases i the cost of mobile sevices, o eatioal leaig, would be eflected i the diffeece betwee the effect of seuetial ety ad that of simultaeous ety. othe possibily is that wh seuetial ety the ew competo has to pice moe aggessively to establish self i the maket. t test based o the Hefidahl idex of maket cocetatio 29, 30 evealed that seuetial ety led ideed to highe idusty cocetatio at the ed of The thid ad fouth colums i Table 2-3 peset esults of estimatios i which competio vaiables wee teated as if they wee exogeous. The compaiso wh the coespodig esults i the fist two colums shows the impotace of accoutig fo selfselectio o behalf of couties. The coefficiets fom the istumeted specificatios ae smalle. The diffeece betwee the coefficiets o simultaeous competio is sigificatly diffeet fom zeo at 5% level of sigificace, ad so is the diffeece betwee the coefficiets o seuetial competio obtaied fom the two estimatios. The diffeece betwee the coefficiets o competio fom colums ad 3 is sigificat at 0%. These diffeeces taslate o sizeable diffeeces i pedicted adoptio levels, as is evidet fom the esults i Table 2-5. Simulatio esults i Table 2-5 wee computed usig the specificatios i Table 2-4 colums 2 ad 4, ad ae based o aveage ad stadad deviatio values of vaiables fo the 29 Collusio is easie achieved whe the competig etwoks ae of simila size Laffot, Rey ad Tiole [998a, b], that is, whe the Hefidahl Idex is smalle fo a give umbe of competos. The aveage value of the Hefidahl idex at the ed of 2002 was 450 fo couties that oduced competio simultaeously, ad 5600 fo couties that oduced competio seuetially. The diffeece is statistically sigificat at % level of sigificace. 30 The Hefidahl idex was employed i alteative specificatios of the diffusio model istead of the competio vaiables descibed above. The coefficiet o the Hefidahl idex vaiable tued out to be magially isigificat. This is due to the eductio i sample size caused by missig values i the umbe of subscibes of each telecommuicatios opeato. 32

33 yea ll couties ae assumed to have the same maket potetial of 59%. 3 The aveage couty was cosideed to be a membe of the thid goup of couties, the alkas, fo the puposes of these simulatios. The last two colums peset the effect of sepaate chages i each vaiable. 32 The pedicted effect of seuetial competio is the total effect o the cellula peetatio level at the ed of 2002, assumig that competio was oduced seuetially i 999. The pedicted effect of simultaeous competio is the total effect o the cellula peetatio level at the ed of 2002 esultig fom the oductio of two o moe digal opeatos i 996. The esults illustate the tadeoff betwee oducig digal competio simultaeously vesus seuetially. Seuetial competio atually occued late tha simultaeous competio, but the catchig-up effect due to the highe coefficiet of seuetial competio meat that by 2002 the effects of the two types of ety wee vey simila. Table 2-5 also demostates the impotace of accoutig fo the edogeey of policy decisios. Whe the edogeey of competio policy is ot accouted fo, the model pedicts thee would be 23 to 24 moe cellula subscibes pe 00 idividuals as a esult of seuetial competio, ad 20 to 2 moe cellula subscibes as a esult of simultaeous competio. I cotast, the coespodig iceases whe accoutig fo the edogeey of policy decisios ae oly 9 ad 8 subscibes pe 00 idividuals, espectively. 3 This value, obtaied by costaiig all couties to have the same maket potetial, is close to the value of 62% obtaied by Gube ad Vebove [200a] fo the Euopea Uio membe couties. The value obtaied by Gube [200] fo 0 out of these 9 couties was 7%. 32 The total effect o cellula peetatio fom chagig moe vaiables at the same time does ot eual the sum of the effects of sepaate chages i each vaiable due to the oliea fuctioal fom. The egative effect of a oe stadad eo icease i GDP pe capa does ot ecessaily mea that iche couties will have lowe peetatio levels tha pooe oes. Riche couties geeally also have highe levels of fixed lie peetatio, which is associated wh educed mobile adoptio. highe GDP pe capa has a posive effect o cellula peetatio ates oughly though 2000, afte which the effect becomes egative. 33

34 Coclusio I have aalyzed the detemiats of mobile commuicatios adoptio i the fome socialist couties fom Easte Euope ad Cetal sia. The socioecoomic chaacteistics of these couties played a impotat ole i detemiig the level ad speed of mobile commuicatios diffusio. s expected, couties wh a highe level of eal pe capa icome had highe iial levels of cellula peetatio, although thei advatage dimiished ove time. Couties wh a highe umbe of fixed lies pe capa ad couties wh highe waig lists fo fixed lies expeieced lowe iial levels of cellula adoptio, but highe subseuet gowth. Techological factos had a impotat impact o mobile techology diffusio. The level of adoptio was sigificatly lowe duig the aalog ea due to capacy costas ad elatively high pices. The oductio of competio led to a substatial acceleatio i the speed of adoptio of cellula commuicatios. Futhemoe, ad pehaps moe supisigly, seuetial competio led to highe gowth i the umbe of subscibes tha simultaeous competio. Thus, thee appeas to be a catchig up effect of seuetial competio, compesatig fo the fact that seuetial ety atually occus late tha simultaeous ety. This eseach also demostates the impotace of accoutig fo the edogeey of key policy decisios, such as the timig of the oductio of competio. Failue to accout fo this edogeey leads to upwad biased estimates of the effect of competio o cellula adoptio ates. The goupig of couties eflects both histoical ad geogaphical cosideatios i ode to miimize the heteogeey betwee goup membes. fist divisio is that betwee fome Soviet Uio epublics ad the othe fome socialist couties. This divisio eflects the 34

35 commo histoy of the fome Soviet Uio Republics, ad the fact that most of the epublics ae still i the sphee of ifluece of the Russia Fedeatio. mog fome Soviet Uio Republics, the altic States have slightly diffeet cultual ad histoical backgoud. They ae close i this espect to the fome socialist couties that wee ot pat of the Soviet Uio. The altic States ae also the oly fome Soviet Uio couties that have joied the Euopea Uio. Couties that wee ot membes of the Soviet Uio wee futhe divided o those i Cetal Euope, ad those i the alka Peisula. This is ot oly a geogaphical divisio. It also eflects the fact that couties i the alka Peisula wee fo a log peiod of time ude the occupatio of the Ottoma Empie, while the othe couties wee at least patially ude usto-hugaia occupatio. The two empies left thei mak ot oly o the cultue, but also o the ecoomic istutios of these couties. 35

36 36 Table 2-. Numbe of digal mobile opeatos alog sice Couty ame Goup lbaia alka * 2 meia CIS * 994 zebaija CIS * 2 993* ulgaia alka 2 osia ad 2 3* Hezegovia a CE 993* elaus a CIS * 2 99 Czech Republic CE 2* 3 99* Estoia altic 2 3* Geogia CIS 2 990* Coatia CE * Hugay CE 2* Kazakhsta CIS 2* 3 Kygyzsta CIS * 2 992* Lhuaia altic 2* 3 992* Latvia altic * 2 995* Moldova CIS * 2 3 Macedoia a alka * 992* Polad CE 2 3* 993* Romaia CE 2 3* 4 99 Russia a CIS 99* Slovakia CE 2* 3 996* Tajikista a CIS 2 Tukmeista a CIS 993* Ukaie CIS 4* Uzbekista CIS 2* 5 Yugoslavia a alka * idicates ety by the icumbet fixed lie opeato o the mobile maket. a idicates that the couty is ot pat of estimatios.

37 Table 2-2. Fome socialist couties: desciptive statistics Couty ame Goup Real GDP pe capa Mai lies pe 00 i 995 CST. USD ihabats Cell phoes pe 00 ihabats veage Std. dev veage lbaia alka % 7.% 2.6% 27.6% ulgaia alka % 36.8% 3.% 33.3% Macedoia a alka % 27.% 20.0% 7.7% Yugoslavia a alka 6.6% 23.3% 20.0% 25.7% Estoia altic % 35.% 29.% 65.0% Latvia altic % 30.% 28.0% 39.4% Lhuaia altic % 27.0% 26.5% 47.5% osia ad Hezegovia a CE %* 23.7% 0.8% 9.6% Czech Republic CE % 36.2% 27.5% 84.9% Coatia CE % 4.7% 29.6% 53.5% Hugay CE % 36.% 25.0% 67.6% Polad CE % 29.5% 8.5% 36.3% Romaia CE % 9.4% 4.3% 23.6% Slovakia CE % 26.8% 22.7% 54.4% meia CIS % 4.3% 5.3%.9% zebaija CIS %.4% 9.2% 0.7% elaus a CIS % 29.9% 2.7% 4.7% Geogia CIS % 3.%.5% 0.2% Kazakhsta CIS % 3.0% 0.8% 6.4% Kygyzsta CIS % 7.8% 7.7%.0% Moldova CIS % 6.% 3.2% 7.7% Russia a CIS % 24.2% 8.6% 2.0% Tajikista a CIS % 3.7% 4.2% 0.2% Tukmeista a CIS % 7.7% 7.3% 0.2% Ukaie CIS % 2.6% 7.5% 8.4% Uzbekista CIS % 6.7% 6.8% 0.7% Mi % 3.7% 2.6% 0.2% Max % 4.7% 3.% 84.9% veage % 2.9% 7.3% 25.4% * data available oly sice 994. a idicates that the couty is ot pat of estimatios. 37

38 Table 2-3. Empiical aalysis of mobile telecommuicatios diffusio: diffeet factios of potetial adoptes fo each goup Mobile diffusio paametes Vaiables z IV a z IV a z Patial IV b z Patial IV b Locatio paametes fo couty chaacteistics Gowth paametes fo couty chaacteistics Gowth paametes fo competio vaiables Locatio paametes fo techology vaiables Gowth paametes fo techology vaiables Mailies pe capa *** Waig list *** -3.4 Real GDP pe *** capa 4.65 Mailies pe *** capa 3.90 Waig list.008 ** 2.4 Real GDP pe *** capa Competio 0.2 ** 2.20 Seuetial ety - Simultaeous ety - Digal oly ** alog * -.85 Digal oly *** *** *** *** *** *** *** * ** ** * *** *** *** *** ** *** *** ** * *** *** *** *** *** *** *** *** ** ** *.78 alog djusted R 2 N obsevatios N couties Mi # obs. pe couty symptotic omal statistics i paetheses. * Sigificat at 0%; ** sigificat at 5%; *** sigificat at %. a Mailies pe capa, waig list, as well as all competio vaiables wee istumeted. b Oly mailies pe capa ad waig list wee istumeted. The depedet vaiable is z l m /γ i -m, whee m is the umbe of cellula subscibes pe capa, ad couty goups have diffeet estimated maket potetials: γ i 0.9 if couty belogs to the Cetal Euope o altic goups, γ I 0.63 if the couty belogs to the alka goup, ad γ I 0.5 if the couty belogs to the CIS goup. ll estimatios iclude timig ad speed couty goup fixed effects. 38

39 Table 2-4. Empiical aalysis of mobile telecommuicatios diffusio: commo factio of potetial adoptes fo all goups Mobile diffusio paametes z IV a z IV a z Patial IV b z Patial IV b Locatio paametes fo couty chaacteistics Mailies pe capa *** *** *** *** Gowth paametes fo couty chaacteistics Waig list *** Real GDP pe capa *** 4.8 Mailies pe capa 3.88 *** *** *** *** *** *** *** *** *** *** 4.00 Gowth paametes fo competio vaiables Waig list 0.92 ** 2.22 Real GDP pe capa *** Competio 0.24 ** ** *** ** *** *** ** *** Locatio paametes fo techology vaiables Seuetial ety ** 2.55 Simultaeous ety ** 2.08 Digal oly ** ** *** *** ** ** Gowth paametes fo techology vaiables alog * -.87 Digal oly * ** ** * * ** **.98 djusted R 2 N obsevatios N couties Mi # obs. pe couty alog symptotic omal statistics i paetheses. * sigificat at 0%; ** sigificat at 5%; *** sigificat at %. a Mailies pe capa, waig list, as well as all competio vaiables wee istumeted. b Oly mailies pe capa ad waig list wee istumeted. The depedet vaiable is z l m /0.59-m, whee m is the umbe of cellula subscibes pe capa, ad all couties ae assumed to have the same maket potetial. The estimated commo factio of potetial subscibes is ll estimatios iclude timig ad speed couty goup fixed effects. 39

40 Table 2-5. Cumulative effect o cellula peetatio of a oe stadad deviatio icease i socioecoomic chaacteistics, o a 0 to chage i the dummy vaiables of eest Mobile diffusio based o estimatios wh commo factio of potetial adoptes fo all goups of 59% Simulatio Setup Cumulative pedicted effect o cellula peetatio by the ed of 2002 fom Table 2-4, col. 2 competio vaiables istumeted Cumulative pedicted effect o cellula peetatio by the ed of 2002 fom table 2-4, col. 4 competio vaiables ot istumeted Vaiables 2002 Mea 2002 Std. dev. Oe std. dev, o 0 to icease Mailies pe capa % 27.0% Waig list % 2.4% Real GDP pe capa % -5.% Seuetial ety 0 8.9% 23.5% Simultaeous ety 0 7.7% 20.4% Digal oly 0 alog 0 Oe std. dev., o 0 to icease 40

41 Figue 2-. Evolutio of cellula peetatio ates i the Czech Republic ad Estoia 4

42 CHPTER 3 N EMPIRICL NLYSIS OF FIXED ND MOILE RODND DIFFUSION Itoductio oadbad commuicatios lie at the heat of the developig ifomatio society. Widespead boadbad diffusio ecouages iovatio, cotibutes to poductivy ad gowth, ad attacts foeig ivestmet. The Iteatioal Telecommuicatio Uio ITU defies boadbad as a etwok offeig a combied speed eual to, o geate tha, 256 Kb/s i oe o both diectios ITU, 2005; ITU, s of Decembe 2005, moe tha 66 couties had lauched fixed boadbad sevices ad 68 ecoomies had lauched mobile boadbad sevices ITU, Fixed boadbad may be defied as tasmissio capacy wh sufficiet badwidth to pem combied povisio of voice, data, ad video though a fixed lie such as DSL ad cable modem ITU, Mobile boadbad povided by 3G mobile systems suppot data taspot ates of at least 256 kb/s Kilob pe secod fo all adio eviomets, which exceed the ates ude secod geeatio wieless etwoks ITU, 2006; ITU, 2003; Shelaski, The 3G mobile systems eable may advaced video applicatios such as mobile videocofeecig, video phoe/mail, mobile TV/Video playe, ad digal audio/video delivey Xavie, 200; ITU, 200. I spe of the oveall apid gowth i boadbad diffusio, may couties ae still i the ealy stages of fixed ad mobile boadbad deploymet ad ae assessig policy stategies to pomote faste adoptio. May couties have cosideed local loop ubudlig LLU 33 ad facilies based competio as impotat policy iiatives to pomote apid fixed boadbad diffusio. Platfom competio facilies-based competio amog seveal diffeet boadbad 33 Local loop ubudlig efes to the pocess of euiig icumbet opeatos to ope, wholly o i pat, the last mile of thei telecommuicatios etwoks to competos ITU, 2003; OECD,

43 platfoms is ofte thought to be cucial fo educig pices, impovig the ualy of sevice, iceasig the umbe of customes ad pomotig ivestmet ad iovatio ITU, 2003; Maldoom et al., Expets diffe o whethe sigle o multiple stadads pomote faste diffusio of mobile commuicatios. Thee is a gowig body of leatue o fixed boadbad diffusio, but thee ae still vey few coss-cultual empiical studies examiig the impotat ifluetial factos of global boadbad diffusio. The esults ae ot always cosistet, ad isufficiet data has peveted pevious studies fom captuig the oliea atue of boadbad diffusio. I addio, i spe of s sigificace ad implicatios, thee is o empiical study to ou kowledge about ifluetial factos of mobile boadbad diffusio because mobile boadbad deploymet bega oly i ecet yeas. Fo the same easo, we ae ot awae of ay study that ivestigates whethe fixed boadbad is a complemet o a substute fo mobile boadbad. Usig OECD Ogaizatio fo Ecoomic Coopeatio ad Developmet data, the logest available pael to date, we estimate a logistic egessio to captue the oliea atue ad examie the ifluetial factos of fixed boadbad diffusio. We fid that local loop ubudlig, ifomatio ad commuicatios techology ICT ifastuctue, populatio desy, ad Iteet cotet all ifluece boadbad diffusio. Platfom competio is a sigificat dive of cable modem boadbad, but ot DSL diffusio. alyzig data fom 2005 fo a coss-sectio of 5 couties we also fid that multiple stadads policy, mobile applicatio pice, ad populatio desy ifluece the diffusio of 43

44 mobile boadbad. 34 Ou esults idicate that fixed boadbad is ehe a complemet o a substute fo mobile boadbad yet. This chapte is ogaized as follows: Sectio 2 summaizes the existig leatue o fixed ad mobile commuicatios diffusio, Sectio 3 pesets the methodology ad data, Sectio 4 pesets the esults, ad Sectio 5 cocludes. Leatue Review Thee has bee a steady gowth of fixed ad mobile boadbad adoptio i the wold. Thee wee some 26 millio fixed boadbad subscibes ad just ove 60 millio mobile boadbad subscibes at the ed of 2005 ITU, The adoptio of fixed boadbad sevice duig the fist 0 yeas of s availabily has poceeded moe apidly tha the coespodig adoptio of pevious sevices such as cellula telephoe ad dial-up Iteet sevices acoss OECD couties OECD, The domiat fixed boadbad access platfoms ae DSL Digal Subscibe Lie wh 6.85 % of the maket ad cable modem %. Othe platfoms such as fibe-to-the-home FTTH ad wieless boadbad access seve appoximately 6 % of the maket ITU, s of Decembe 2006, Demak, Nethelads, Icelad, Koea, ad Swzelad had the highest boadbad peetatio ates amog OECD couties OECD, 2007; see Table 3-. The extet of mobile boadbad diffusio vaies widely acoss couties. s of Novembe 2005, Koea, Isael, Caada, Japa, ad the Ued States wee the top five mobile boadbad ecoomies i tems of the pecetage of 3G subscibes ITU, 2005; see Table 3-2. WCDM ad CDM 2000 ae the two mai stadads fo 3G wieless techologies Gadal et al., Most of the Euopea Commuy adopted WCDM fo 3G wieless sevices. y Novembe 34 We ae costaied to use liea egessio to aalyze mobile boadbad diffusio by the small umbe of yeas of data available. Pevious studies of fist ad secod geeatio mobile commuicatios diffusio have evideced the oliea atue of the adoptio pocess see Gube ad Vebove 200, ad Macu 2004 fo example. 44

45 2005, almost 92 pecet of the Euopea 3G mobile customes subscibed to WCDM techology-based sevices ITU, O the othe had, may couties i the meicas, sia, ad fica adopted CDM 2000 o both CDM 2000 ad WCDM i thei 3G makets. Empiical Studies o Global Fixed oadbad Diffusio Thee is a gowig body of empiical eseach about fixed boadbad diffusio. Some empiical studies fid that e-modal competio, local loop ubudlig LLU, icome, low boadbad pices, ad demogaphic vaiables such as populatio desy icease fixed boadbad diffusio Distaso et al., 2006; Gacia-Muillo, 2005; Gosso, 2006; Lee, 2006b. I thei study of 30 OECD couties, Cava-Feeuela ad labau-muňoz 2006 fid that techological competio, low cost of deployig ifastuctues, ad pedilectio to use ew techologies ae key factos fo boadbad supply ad demad. alyzig data fom 4 Euopea couties, Distaso et al ague that e-platfom competio dives boadbad diffusio, but that competio i the DSL maket does ot play a sigificat ole. Usig log egessio, Gacia-Muillo 2005 fids that ubudlig a icumbet s ifastuctue oly esults i a substatial icease i boadbad deploymet fo middle-icome couties, but ot fo thei high-icome coutepats. Kim ad othes 2003 suggest the pepaedess of a atio ad the cost codios of deployig advaced etwoks ae the most cosistet factos explaiig boadbad uptake i OECD couties. Usig geealized least suaes, Gosso 2006 fids that competio, icome, ad ubudlig icease boadbad diffusio see Table 3-3. Empiical Studies o Global Mobile Diffusio Pevious empiical studies o global mobile diffusio fid that stadadizatio policy, competio, ad low use cost ae ifluetial factos of global mobile diffusio Gube, 200; Gube ad Vebove, 200b; Liikae et. al., 200; Kioski ad Ketschme 2002; Rouvie, 2006; see Table 3-3. Studies i the ecoomics of stadads have focused o the pivate ad 45

46 social icetives fo stadadizatio Gadal, 2002; David ad Geestei, 990. I essece, thee ae both advatages ad disadvatages to maket-mediated multiple stadads elative to a govemet-madated sigle stadad. lthough maket mediated stadads might lead to limed etwok extealies ad ecoomies of scale, multiple wieless stadads ad diffeet types of sevices acoss techologies eable the existece of divese competig systems which may lead to moe ad bette mobile sevices. Gube ad Vebove 200b fid that the ealy diffusio of digal techologies i mobile makets was faste i Euope whee most couties had adopted a sigle stadad. Kioski ad Ketschme 2002 coclude that stadadizatio has a posive but isigificat effect o the timig of iial ety of 2G sevices but ca also lead to highe pices as dampes competio. It appeas that while a govemet madated stadad was useful i stimulatig mobile diffusio i the iial stage e.g., fist geeatio mobile, stadadizatio policies become less elevat ad eve limig as mobile techology becomes moe advaced Cabal ad Ketschme, s log as mobile etwoks ae ecoected ad coveage is effective, thee is ltle eed fo compatibily Gadal et al., Cabal ad Ketschme 2004 examied the effectiveess of public policy i the cotext of competig stadads wh etwok extealies ad cocluded that cuet mobile diffusio levels ae ue simila betwee the Ued States multiple stadads ad Euope mostly sigle stadad. Moe ecetly, Rouvie 2006 fids that stadads competio hides ad maket competio pomotes diffusio i both developed ad developig couties. Table 3-3 summaizes the vaiables ad fidigs of empiical studies o global boadbad diffusio. I spe of a gowig body of leatue that addesses the factos cotibutig to fixed boadbad diffusio at the atioal level, the esults of empiical studies ae ot always cosistet ad isufficiet data has peveted pevious studies fom captuig the oliea 46

47 atue of boadbad diffusio. I paticula, the esults coceig the effects of icome, fixed boadbad pice, competio, ad ubaizatio o fixed boadbad diffusio ae mixed see Table 3-3 ad Ridde, I addio, few empiical studies have focused o the factos that affect mobile boadbad diffusio globally. We ae ot awae of ay study that ivestigates whethe fixed boadbad is a complemet o a substute fo mobile boadbad. Fixed oadbad The Model, Method, ad Data We estimate a logistic model of fixed boadbad peetatio. The logistic specificatio is appealig because povides a meas of captuig the existece of etwok extealies Gube ad Vebove 200b. I the begiig few people have boadbad Iteet access. ecause people value the possibily to eact wh ad to access cotet povided by othe people, moe ad moe people adopt the techology as the stock of subscibes iceases, leadig to a expoetial icease i the umbe of boadbad uses. Howeve, the flow of subscibes declies as the stock appoaches the total umbe of potetial adoptes i the maket, pehaps due to cogestio o low valuatio fo boadbad sevices amog the emaiig o-subscibes. I may OECD couties the S-shaped time pofile of the logistic cuve appeas to appoximate well the diffusio of fixed boadbad see Figues 3- to 3-4. Lettig y deote the pecetage of couty i s populatio that has boadbad access to the Iteet by time t, the stadad logistic diffusio euatio is y * y exp a b t, 3- whee a ad b ae paametes, as discussed below, ad y * is the peetatio ceilig o pecetage of potetial adoptes. 47

48 Not all idividuals i a couty adopt a ew techology, such as boadbad, egadless of how iexpesive the techology may become. This is captued i the model by the ceilig paamete * y. The paamete a i Euatio 3- is a costat of egatio that gives the iial value of boadbad peetatio. 35 posive value shifts the S-shaped fuctio upwads while a egative oe shifts dowwads, whout modifyig the S-shape. The paamete b i Euatio 3- captues the speed of diffusio. This ca be see by diffeetiatig Euatio 3- wh espect to time dy dt y * y y b. 3-2 * y Euatio 3-2 shows that b is eual to the gowth ate i the umbe of adoptes, elative to the factio of potetial subscibes who have ot yet adopted the techology. We allow the speed of diffusio to vay wh policy vaiables D ad couty socioecoomic chaacteistics J 0 j j b D X j X i liea fashio 36 The couty chaacteistics icluded i. 3-3 X ae vaiables that ae likely to ifluece the supply of ad the demad fo boadbad. We expect the demad fo boadbad to icease wh aveage disposable icome measued by eal GDP pe capa expessed i costat 2000 US Dollas, the umbe of computes pe 00 ihabats, ad Iteet cotet specific to the j * y e 35 Note that y as t 0. a 36 Two boad classes of logistic diffusio models have bee poposed: the vaiable-ceilig logistic ad the vaiablespeed logistic Feadez-Coejo ad Mcide Lettig the ceilig vay wh couty chaacteistics poses sigificat estimatio poblems. Thee is o guaatee that the paamete will stay at theoetically justifiable levels, o that the model will covege. The vaiable-speed logistic model is easie to estimate ad the speed of adoptio ca be posive o egative, depedig o the movemet of exogeous factos. 48

49 couty i uestio we use the umbe of Iteet hosts ude couty-elated code ames pe 0000 ihabats as a poxy fo Iteet cotet. 37 Highe populatio desy ad pecetage of uba populatio decease deploymet cost, iceasig the supply of boadbad. We ae maily eested i the impact of policy vaiables o boadbad peetatio. The policy vaiables icluded i ou study ae dummy vaiables captuig the ubudlig of the local loop ad the existece of platfom competio. Ou measue of platfom competio euals oe fo yeas i which both cable ad DSL subscibe existed i the couty. The local loop ubudlig dummy euals oe fo yeas whe ubudlig was i effect ad zeo othewise. The dummy vaiables thus chage ove time, depedig o the timig of the oductio of competio ad the yea ubudlig bega. Some pevious studies have foud that e-modal competio ad local loop ubudlig ae impotat detemiats of boadbad peetatio Cava-Feeuela ad labau-muňoz, thid policy vaiable, the shae of state oweship i the icumbet telecommuicatios opeato tued out to be isigificat ad did ot affect the ualative esults of ou estimatios, so we excluded fom the epoted esults ad estimatios. 3-4 ecods the vaiables i ou egessio aalysis, thei measues, ad the data souces. Mobile oadbad We employ a secoday dataset ad liea egessio to examie the ifluetial factos of global mobile boadbad diffusio. s mobile boadbad is elatively youg, data is oly available fo a coss-sectio of 5 couties. Table 3-5 ecods the vaiables used, thei measues, ad the data souces. 37 host is a domai ame that has a IP Iteet Potocol addess associated wh. Thee wee appoximately 64 millio hosts coected ude OECD couty-elated couty code domais i Jauay The lagest couty code domai at that time was.jp Japa, though the umbe of hosts ude vaious US-elated domais.us,.edu,.mil,.gov was lage. 49

50 The depedet vaiable, the 3G mobile diffusio ate, is measued by the umbe of 3G mobile subscibes pe 00 ihabats i a couty. Pevious studies Madde et al. 2004; Koski ad Ketschme, 2002; Gube 200; h ad Lee, 999 also used mobile subscibes pe 00 ihabats to measue mobile diffusio. To examie the effect of stadadizatio policy, we employ a dummy vaiable eual to oe if a couty had multiple stadads, ad zeo othewise. We use the pice pe miute of a local mobile call duig peak hous i US Dollas collected by the ITU to measue the pice of mobile sevices i each couty. This measuemet efes to the aveage pice of oe-miute mobile calls whi the same etwok, off-et, ad to a fixed lie duig peak hous ITU, Regadig o-voice mobile applicatios, we adopted the pice of shot message sevices SMS as a poxy fo the pice of mobile boadbad elevat applicatios. SMS is a featue available i may ew digal phoes that lets uses eceive ad sed shot text messages. Fo the measuemet of fixed boadbad pice, we employ USD pe 00Kb/s. Educatio could be a dive of mobile boadbad adoptio, as leate people ad those wh highe educatio/degee levels pobably have moe to beef fom boadbad Iteet access Gacia-Muillo, 2005; Clemets ad bamowz; Fo the measuemet of educatio we use the UNDP educatio idex 38, which is based both o the adult leacy ate ad the combied goss eollmet atio fo pimay, secoday ad tetiay schools UNDP, We use populatio desy measued i ihabats pe km 2 ad the pecetage of uba populatio to captue demogaphic aspects of diffusio. Pevious studies have foud that populatio desy is a key dive of boadbad deploymet, while the shae of uba populatio 38 The Ued Natios Developmet Pogamme UNDP educatio idex measues a couty s elative achievemet i both adult leacy ad combied pimay, secoday ad tetiay goss eolmet. Iially a idex fo adult leacy ad oe fo combied goss eolmet ae calculated ad the these two idices ae combied to ceate the educatio idex, wh two-thids weight give to adult leacy ad oe-thid weight to combied goss eolmet UNDP,

51 was ot sigificat Gube, 200; Liikae et. al, 2004; Koski ad Ketschme, 2002; Rouvie, We use GDP pe capa expessed i US dollas as a measue of disposable icome. Fially, to assess the impotace of ifomatio ad commuicatio techology ifastuctue, we adopted the usual ICT measues of estimated PCs pe 00 ihabats ITU, 2006 ad teledesy i.e., mai telephoe lies pe 00 ihabats. Data comes fom the Iteatioal Telecommuicatio Uio ad UNDP. I summay, the liea egessio compose model we employ to examie the ifluece of uatifiable vaiables o the diffusio pattes of 3G mobile i idividual couties is Y t 3G Mobile Peetatio Rate 0 Dummy-Stadadizatio Policy 2 ICT Ifastuctue 3 Mobile Pice 4 Populatio Desy 5 Educatio 6 Teledesy 7 Icome 8 Fixed oadbad Pice 9 Pice of Mobile pplicatio t 3-4 Results ad alysis Fixed oadbad Ou data coves all 30 OECD couties. To ou kowledge, o othe study employs data as ecet as 2005 whe examiig boadbad diffusio. We estimate the vaiable-speed logistic model descibed i Euatios 3- ad 3-3 by oliea least suaes, afte addig distubaces to Euatio 3-. The esults ae peseted i Table 3-6. I addio to the esults of fixed boadbad peetatio estimatios, Table 3-6 also pesets esults of sepaate estimatios fo DSL ad cable peetatio Othe high speed techologies such as WiFi ad fibe to the home FTTH played a elatively isigificat ole i oadbad Iteet peetatio fo the couties ad yeas i ou sample. 5

52 The use of pesoal computes was associated wh highe boadbad ad cable peetatio levels, though ot wh DSL peetatio. Icome was sigificat oly i the cable euatio, ad had a uexpected egative sig. It is possible that we ae uable to adeuately disetagle the effects of these vaiables. Pe capa disposable icome is highly coelated wh ou ICT ifastuctue idicato, the umbe of pesoal computes pe 00 ihabats the coelatio is close to 0.8. While this may lead to multicollieay ad impecise estimates of the coefficiets, theoy suggests they ae both vey impotat detemiats of boadbad peetatio. Fo this easo we opted to epot esults wh both vaiables icluded i the estimatios. lteative estimatios that icluded oly oe of the vaiables povided ualatively simila esults. Ou poxy fo available Iteet cotet the umbe of Iteet hosts pe 0000 ihabats is posively associated wh the depedet vaiables i all ou models. Howeve, this esult should be epeted wh cae, as highe boadbad peetatio may i tu lead to a lage umbe of Iteet hosts. That is, the vaiables may be edogeous. The same ca be said about the umbe of PCs pe 00 ihabats. To addess this potetial edogeey poblem we also a estimatios usig oe yea lags of the two vaiables. The Iteet cotet poxy became isigificat i the cable ad DSL estimatios the vaiable was oly sigificat at 0% level befoe usig the lags. ll othe esults wee ualatively ad umeically simila. We fid that highe populatio desy iceases the speed of boadbad peetatio. Howeve, the pecetage of uba populatio is isigificat i all thee euatios. We iclude both the pecetage of uba populatio ad populatio desy i the estimatios, as thee is ltle coelatio betwee them i ou sample. Theoetically they ae both dives of cost, ad hece the supply of boadbad. The elatively low coelatio is pobably due to the existece of two types of couties i ou sample: lage couties like the US, Caada, ad ustalia, wh a 52

53 high pecetage of uba populatio yet elatively low populatio desy, ad smalle couties, like most Euopea couties, that have both a elatively high populatio desy ad a high pecetage of uba populatio. LLU ecouages competio by educig ecoomic baies to ety, theeby allowig ew etats to build some compoets of thei etwoks ad obtai othe compoets fom the icumbet DSL opeato OECD, 200. Competio may big eal choice fo customes ad educe pices i the boadbad access maket Lee, 2006b; Maldoom et al., Howeve, LLU may also esult i lowe boadbad peetatio by educig the icetives of icumbet supplies to ivest i boadbad ifastuctue. Thee is geat vaiatio i the ways local loop ubudlig has bee implemeted i diffeet couties. Ufotuately, we wee uable to fid measues such as leased lie pices o the shae of leased lies i total lies fo a lage eough umbe of obsevatios i ou sample. Nevetheless, the dummy vaiable captuig the implemetatio of local loop ubudlig is sigificat i all ou estimatios. Local loop ubudlig appeas to have sigificatly iceased the speed of boadbad diffusio. ccodig to a ITU epot, the existece of stog platfom competio amog DSL, cable modem, fibe, ad wieless boadbad i a maket may esue that pices emai low ITU, I this cotext, i the boadbad access maket, egulatio acoss platfoms should be as competively eutal as possible to sustai stog platfom competio. eestig esult is that of the effect of platfom competio o boadbad peetatio. While platfom competio is isigificat i ou estimatios of oveall boadbad peetatio, a close look at the euatios we estimated sepaately fo cable ad DSL peetatio eveals the fact that platfom competio is sigificatly associated wh a highe speed of cable modem boadbad diffusio. 53

54 Oe coce is potetial self-selectio o behalf of couties implemetig policy decisios like ubudlig the local loop. To addess this issue ad to futhe check ou esults we a sepaate estimatios fo the sub-samples of EU Euopea Uio ad o EU membe couties. EU membe couties had to implemet local loop ubudlig to comply wh a EU diective, so thee is less coce about self-selectio i the EU sub-sample. The esults appea to be obust. s befoe, LLU was posive ad sigificat i all the estimatios, while platfom competio was sigificat oly i the cable euatio. Ubudlig speeded up the upgadig of swches ad esued the wide availabily of DSL ITU, Mobile oadbad Ou examiatio of mobile boadbad diffusio employed 5 obsevatios usig liea egessio aalysis. Two models wee idetified fom the multiple egessio aalysis. Iially, all ie idepedet vaiables wee employed. 40 s multicollieay is usually a coce wh a elatively low umbe of obsevatios, Table 3-7 shows the coelatio matix amog idepedet vaiables. Multicollieay does ot appea to be a issue i ou sample. The left pael i Table 3-8 povides the esults of this fist exteded egessio. The egessio model is sigificat at % level. The multiple stadads dummy vaiable, populatio desy, ad the poxy fo the cost of mobile applicatios cost of SMS sevice ae all statistically sigificat at the % level. Mobile sevice pice, icome, teledesy, ICT ifastuctue, ad educatio ae ot statistically sigificat. lso isigificat is the pice of fixed boadbad, so fixed ad mobile boadbad appea to be ehe substutes, o complemets yet. 40 s i pevious studies, the shae of uba populatio was isigificat i ou pelimiay aalysis. We theefoe epot the esults of estimatios that iclude oly populatio desy. 54

55 To check the stabily of the esults, the most isigificat vaiables wee emoved ad a secod, educed model was estimated. 4 Teledesy, fixed boadbad pice, ICT ifastuctue, ad mobile sevice pice wee emoved. The ight pael i 3-8 povides the esults of the esultig educed model. The egessio is still sigificat at the % level. The multiple stadads dummy vaiable, populatio desy, ad the poxy fo the cost of mobile applicatios cost of SMS wee agai statistically sigificat at the % level. Futhemoe, the estimates appea to be vey stable whe compaig the two egessios. We theefoe coclude that multiple stadads, highe populatio desy, ad lowe mobile applicatio pices wee all sigificat dives of mobile boadbad diffusio. Ou fidigs suppot the assetio of Cabal ad Ketschme 2004 that, as mobile techology becomes moe matue, stadadizatio ad s scale ad efficiecy beefs seem to become less elevat. This illustates the impotace of maket mediated multiple stadads whe a ew techology evolves o a diffeet stage of developmet chaacteized by moe advaced, diffeetiable featues. I this cotext, techological divesy is likely to foste iovative applicatios ad bette cosume choices. Cocludig Remaks I this study we aalyze the factos that ifluece the diffusio of fixed ad mobile boadbad. The esults of logistic egessio idicate that ICT ifastuctue, populatio desy, ad boadbad cotet ae associated wh faste fixed boadbad diffusio. We also fid that LLU policies have bee successful i pomotig fixed boadbad diffusio i may OECD couties. The effects of platfom competio o fixed boadbad diffusio ae vey eestig. We foud that platfom competio cotibuted maily to cable modem diffusio. Moe efied 4 The emoved vaiables had p-values above 25%, ad wh the exceptio of fixed boadbad pice they all had p- values above 40%. 55

56 eseach about the impacts of platfom competio is ecessay i the futue. high level of ICT ifastuctue ad boadbad cotet ae also impotat dives of fixed boadbad diffusio. Highe populatio desy cotibutes sigificatly to fixed boadbad deploymet. I light of the ecet debates ad allegatios that some couties have falle behid while othes ae ahead i the boadbad adoptio ace, ou esults suggest that lage, less desely populated couties ae ideed at a disadvatage whe comes to the deploymet of boadbad commuicatios. Oe should theefoe execise cautio ad coduct a caeful aalysis befoe cocludig that cetai couties ae ahead o ae fallig behid. 42 Ou liea egessio esults suggest that a maket-based multiple stadads policy sigificatly cotibutes to the diffusio of mobile boadbad sevices. The pice of mobile boadbad applicatios is also a ifluetial facto of mobile boadbad diffusio. It seems that a lowe pice fo popula mobile applicatios is cical i attactig the cosumes to the moe advaced o-voice mobile sevices Lee et al., I othe wods, a competive picig system fo applicatios that ca leveage the uiue chaacteistics of mobile boadbad etwoks ecouages apid ad widespead diffusio of mobile boadbad. Just like i the case of fixed boadbad, populatio desy cotibutes sigificatly to mobile boadbad diffusio. This study is limed by the elatively small umbe of obsevatios i ou sample, paticulaly o mobile boadbad. s moe data becomes available may be possible to captue the potetially oliea atue of mobile boadbad diffusio, ad to costuct bette measues of boadbad policies such as LLU ad platfom competio. ased upo studies that suggest mobile telephoy seves as a substute fo fixed phoe sevices Feldma, 2003, oe might 42 I a policy pape wte at the same time as this pape, Fod et al popose a policy-elevat method fo compaig boadbad adoptio amog couties. 56

57 expect a simila elatioship betwee fixed ad mobile boadbad. Ou pelimiay fidigs did ot suppot the hypothesis that fixed ad mobile boadbad ae substutes, o did they suppot the hypothesis that they ae complemets. It may be too ealy to idicate a pemaet esult, cosideig that mobile boadbad is elatively ew i the maketplace. Futhe eseach is ecessay to bette assess the atue of the elatio betwee fixed ad mobile boadbad, as well as the effects of boadbad policies o boadbad diffusio. 57

58 Table 3-. oadbad peetatio ate top 5 OECD couties, by techology, Decembe 2006 DSL Cable Fibe/LN Othe Total Rak Total subscibes Demak ,728,359 Nethelads ,92,200 Icelad ,738 Koea ,042,728 Swzelad ,40,309 Data wee deived fom Ogaizatio fo Ecoomic Coopeatio ad Developmet boadbad statistics

59 Table 3-2. Mobile boadbad 3G Mobile peetatio top 5 OECD couties, G Mobile peetatio 3G as % of all mobile subscibes Rak Total 3G subscibes Koea ,509,000 Isael ,823, 000 Caada ,400,000 Japa ,700,000 Ued States ,550,000 Data wee deived fom the Iteatioal Telecommuicatio Uio Iteet epots

60 60 Table 3-3. Mai empiical studies of fixed ad mobile boadbad diffusio Study Fixed boadbad Sigificat fidigs Study Mobile boadbad Sigificat fidigs Mai idepedet vaiables Mai idepedet vaiables Kim et. al oadbad pice Pepaedess of a Gube 200 Icome Late mobile adoptio atio Dial-up sevice pice Populatio desy Uba populatio Multiple opeatos 30 couties Icome 40 couties Fixed peetatio High fixed peetatio Pepaedess of a Wa time Wa time atio Competio Digal mobile competio Populatio desy Numbe of mobile opeatos Policy ubudlig, coss oweship, govemet fudig Maket tasio idex Gacia-Muillo 2005 oadbad pice oadbad pice Liikae et al. 200 Icome Digal mobile oductio Icome Icome Uba populatio hides aalog mobile diffusio 92 couties Educatio Populatio desy 80 couties Mobile telephoy opeatio Geeatio-specific esults diffe fom Competio Competio alog/digal geeic esults peetatio Populatio desy Iteet access Numbe of aalog/digal stadads Policy ubudlig, coss oweship Ubudlig Yeas sice oductio Cotet Stadad dummy Pesoal computes Fixed peetatio Iteet access ge-depedecy atio

61 Table 3-3. Cotiued Study Distaso et. al Fixed boadbad Mai idepedet vaiables Ita-modal competio Ite-modal Sigificat fidigs Study Mobile boadbad Mai idepedet vaiables Sigificat fidigs Ite-modal Gube ad Icome Competio competio LLU pice Vebove 200b Fixed peetatio Sigle stadad competio 4 couties Rights of way Digal mobile Icumbet pe-empt LLU pice 40 couties Stadad seuetial ety Pice of leased lie Competio Pice of te miutes call 6 Cava-Feeuela ad oadbad pice Techological competio Koski ad Icome etwee ad whi stadads labau-muňoz Competio Cost of Ketschme 2002 Uba populatio competio 2006 Ifastuctue deployig Competio Lowe use cost ivestmet ifastuctues 30 couties Telecom sevices peetatio Ecoomic idicatos 32 couties alog mobile peetatio Iteet idicatos Demogaphic idicatos Domiat digal mobile stadad Ecoomic idicatos Mobile opeatos dummy Demogaphic idicatos Educatio idicatos Social idicatos

62 Table 3-3. Cotiued Study Fixed boadbad Mai idepedet vaiables Sigificat fidigs Study Mobile boadbad Mai idepedet vaiables Sigificat fidigs Gosso 2006 Competio Competio Rouvie 2006 Icome Stadads Icome Icome Populatio Competio 30 couties Ubudlig Ubudlig 65 couties Stadads Netwok effects Fixed Iteet peetatio Fixed peetatio / use cost Developmet Techology Democacy 62

63 Table 3-4. Vaiables, measuemet ad data souces fo statistical aalysis fixed boadbad Vaiables Measuemet Data souces Fixed boadbad Fixed boadbad subscibes pe 00 OECD diffusio ihabats Cable modem diffusio Cable modem subscibes pe 00 OECD ihabats DSL diffusio DSL subscibes pe 00 ihabats OECD Icome GDP pe capa ITU ICT ifastuctue Estimated PCs pe 00 ihabats ITU LLU Dummy fo wh LLU, 0 fo o LLU OECD Populatio desy Populatio desy pe km 2 ITU Uba populatio Pecetage of uba populatio Euomoo oadbad cotet Iteet hosts pe 0000 ihabats ITU Platfom competio Dummy fo wh DSL ad cable OECD modem,0 fo oly DSL o cable modem 63

64 Table 3-5. Vaiables, measuemet ad data souces fo statistical aalysis mobile boadbad Vaiables Measuemet Data Souces 3G mobile diffusio 3G mobile subscibes pe 00 ITU 2005, ITU 2006 ihabats Stadadizatio policy Dummy vaiable fo multiple stadads o 0 fo madated stadad ITU 2005, ITU 2006 ICT ifastuctue Estimated PCs pe 00 ihabats ITU 2005, ITU 2006 Mobile sevice pice Pe miute local call USD peak ITU 2005, ITU 2006 Populatio desy Populatio desy pe km 2 ITU 2005, ITU 2006 Pice of mobile Pice of SMS sevice ITU 2005, ITU 2006 applicatio Icome GDP pe capa ITU 2005, ITU 2006 Educatio UNDP educatio idex UNDP 2004, UNDP 2005 Teledesy Mai telephoe lies pe 00 ITU 2005, ITU 2006 ihabats Fixed boadbad pice USD pe 00kb/s ITU 2005, ITU

65 Table 3-6. Logistic egessios of boadbad peetatio oadbad peetatio Cable peetatio DSL peetatio Vaiables Coefficiets t-stat Coefficiets t-stat Coefficiets t-stat Ceilig *** *** *** Iial level paamete *** *** *** Natual speed *** Icome -3.4E E **.83E ICT Ifastuctue * *** LLU *** ** *** Populatio desy * * * Uba populatio Iteet hosts ** 5.23E-05.75* * Platfom competio *** R-suaed Numbe of obsevatios Noliea egessio wh obust stadad eos; * statistically sigificat at the 0% level; ** statistically sigificat at the 5% level; ***statistically sigificat at the % level 65

66 Table 3-7. Sample coelatio matix of vaiables used i mobile boadbad aalysis ICT Mobile Populatio Ifastuctue pice desy Cost of mobile applicatio Icome Educatio Teledesy Fixed boadbad pice ICT ifastuctue Mobile sevice pice.273 Populatio desy Pice of mobile applicatio Icome Educatio Teledesy Fixed boadbad pice

67 Table 3-8. Liea egessios of mobile boadbad peetatio Exteded model Reduced model Vaiable Coefficiets t-stat Coefficiets t-stat Costat Multiple stadads policy 9.580*** *** Mobile sevice pice Icome Populatio desy.030*** *** Fixed boadbad pice ICT ifastuctue Pice of mobile applicatio *** *** Educatio Teledesy R-Suaed Numbe of obsevatios 5 5 ***Statistically sigificat at the % level 67

68 Yea Figue 3-. Cable-modem boadbad subscibes pe capa i the Ued States 68

69 Yea Figue 3-2. DSL subscibes pe capa i the Ued States 69

70 Yea Figue 3-3. Cable-modem boadbad subscibes pe capa i Japa 70

71 Yea Figue 3-4. DSL subscibes pe capa i Japa The oliea atue of boadbad diffusio is eadily appaet. I Japa, oe of the leadig couties i tems of boadbad peetatio, faste techologies like FTTH have begu eplacig DSL ad cable-modem. The diffusio patte aleady exhibs a slowdow i the diffusio of DSL ad cable-modem boadbad, a chaacteistic of the logistic S-shaped cuve. 7

72 CHPTER 4 QULITY PROVISION IN TWO-SIDED MRKETS: THE CSE OF MNGED CRE Itoductio Diect extealies, such as those exeted by isued idividuals o othe membes of the same isuace pool though moal hazad ad/o advese selectio, have log bee aalyzed i health cae makets. 43 This study abstacts fom issues of moal hazad ad advese selectio to focus o idiect extealies betwee doctos ad patiets ad two-sided maket aspects of maaged cae. Two-sided makets ae makets i which thee ae two-way idiect extealies betwee the paticipats i a maket that eact though a emediay platfom. 44 The umbe ad/o ualy, o some othe chaacteistic of membes o oe side of a emediay s etwok affects the utily of eollees o the othe side. case i po is a maaged cae ogaizatio MCO that eeds to attact both doctos ad patiets. Patiets cae about the availabily of doctos. t the same time, doctos cae about the umbe of patiets eolled i the maaged cae pla. Yet ehe patiets o doctos take o accout the idiect extealy they exet o membes of the othe side whe they decide whethe to paticipate i maaged cae. The pesece of idiect extealies leads to impotat depatues fom fudametal esults i tadioal micoecoomics. Fo example, depatues fom magial cost picig may ot ecessaily eflect maket powe. Such depatues could also eflect the elative magude of the idiect extealies exeted by each side mstog [2006]. The picig stuctue i such makets is ofte skewed i favo of oe side, whose cosumptio is subsidized fom the eveues collected o the othe side. Most softwae platfoms ad eet potals opeate i this mae. 43 See ow [963, 968], Zeckhause [970], Ellis ad McGuie [993], Ma ad McGuie [997], Ma ad Rioda [2002]. 44 See Rochet ad Tiole [2003] fo a fomal defiio of two-sided makets. 72

73 Recogizig the impotace ad coseueces of the idiect extealies is essetial to avoid the fallacies of applyig the oe-sided logic to two-sided makets Wight [2004]. Maaged cae diffes fom othe two-sided makets though the fact that the MCO s expected cost is liked to the expected beef deived by eollees though thei health isk. The cost of poducig a video game o the othe had is the same egadless how much games ejoy the game. Theefoe, of paticula impotace i aalyzig maaged cae is the health isk of policyholdes, which i tu depeds o the ualy of health cae povided by the MCO, the size of s physicia etwok, ad the isuace pemium chages. To date, two-sided maket models have focused almost exclusively o the picig decisios of emediaies. 45 The study by Pezzio ad Pigatao [2007] wte at the same time as the peset study is a exceptio. They study ualy povisio by competig hospals i a hoizotal diffeetiatio model wh egulated isuace pemiums. adey ad Rochet s [2006] aalysis of competio betwee maaged cae ogaizatios is the oly othe two-sided appoach to health cae makets the autho is awae of. I exted the leatue by aalyzig the pof maximizig choice of ualy of sevice povided by maaged cae ogaizatios. I this pape, the ualy vaiable captues the degee to which the MCO assists physicias i povidig health cae sevices. It ca be thought of as a ualy-iceasig iput supplied by the MCO, such as diagostic tests o sophisticated health ifomatio pocessig, stoage, ad etieval. I fid that the highe the magial cost of povidig ualy, the lowe the elasticy of the umbe of doctos wh espect to eimbusemets, the moe eollees cae about ualy, ad the lowe the idiect extealy exeted by doctos o patiets, the moe the MCO ca educe 45 Evas ad Schmalesee [2005], ad Rochet ad Tiole [2005] povide a oveview of the two-sided makets leatue. 73

74 physicia compesatio whe iceasig ualy ad maai the same pemium ad umbe of eollees, paticulaly at low levels of ualy elative to eimbusemet. Fo the case of iso-elastic distibutios of patiet health isks ad physicia costs, a icease i the magial cost of povidig ualy deceases the amout of the ualy-iceasig iput povided by the MCO. This i tu deceases the effectiveess of physicias, which leads to lowe physicia eimbusemets ad fewe doctos i the pefeed etwok. Idividuals ae uwillig to pay the same isuace pemium as befoe, ad the demad fo maaged cae shifts dowwads. The isuace pemium deceases, but the decease does ot fully compesate fo the deceases i ualy ad umbe of physicias. Thus, the MCO educes the isk of s patiets mix to avoid povidig the moe costly ualy. Fo populatios moe at isk of becomig ill, as is the case of the ageig populatio of the Ued States, the MCO povides sevices of lowe ualy, pays lowe physicia eimbusemets, ad icludes fewe povides i s pefeed etwok. The isuace pemium deceases, but the MCO fids pofable to eoll some highe isk idividuals. The pecetage deceases i maaged cae ualy, access to doctos, ad eimbusemets to physicias due to iceases i populatio health isks ad i the cost of ualy povisio ae lage i makets whee the extealy exeted by doctos o patiets is geate, idividuals cae moe about ualy, ad the elasticy of the supply of doctos wh espect to eimbusemets is geate. Thus, although MCOs povide sevices of highe ualy ad access to moe doctos i makets whee idividuals cae moe about ualy ad access to doctos, these makets ae also the oes most affected whe the cost of ualy povisio ad populatio health isks icease. The esults illustate the ole played by idiect extealies i shapig the picig ad ualy decisios of maaged cae ogaizatios ad ca explai the gowig public 74

75 dissatisfactio wh maaged cae. They udescoe the impotace of implemetig ad mooig the achievemet of ualy stadads i the face of ogoig iceases i health isk due to populatio ageig, ad that of adjustig the ates paid by govemet pogams like Medicae ad Medicaid accodig to the health isk of maaged cae eollees. The est of the study is ogaized as follows. Sectio 2 pesets the geeal model. Sectio 3 pesets the esults fo iso-elastic distibutios of patiets health isks ad physicias cost of teatmet. Sectio 4 cocludes. The Model Thee is a cotiuum of idividuals of mass N p that diffe accodig to thei pobabily of becomig ill, 0,. The pobabily of becomig ill is distibuted accodig to the cumulative distibutio fuctio F, wh twice cotiuously diffeetiable pobabily desy fuctio f that is posive eveywhee i 0,. The expected utily of type idividuals fom joiig the MCO depeds o the umbe of physicias eolled i the maaged cae etwok, the isuace pemium P they have to pay, ad the ualy of sevice povided by the MCO 46 P,, 0, U. 4- Fo simplicy, I assume patiets pay o out of pocket costs i the fom of coisuace, copaymets, o deductibles. The model thus abstacts fom moal hazad ad advese selectio issues that have bee extesively aalyzed elsewhee i ode to focus o etwok extealy aspects of maaged cae. 46 s is appaet fom the utily specificatio, the model abstacts fom icome effects. This assumptio is ot icompatible wh global isk avesio ad health isuace demad fom idividuals if the pobabily of gettig ill is small, the isuace pemium is small, ad the cost of teatmet is lage adey ad Rochet [2006]. 75

76 The paamete detemies the magude of the extealy exeted by doctos o patiets. Doctos do ot facto o thei decisio-makig the effect thei paticipatio has o the utily of policyholdes. The size of the povide etwok mattes because the MCO does ot pay fo ay teatmet that s eollees might eceive outside s etwok. The model thus captues the case of a health maeace ogaizatio HMO. lage etwok of physicias may lowe patiets taspotatio costs, o icease the likelihood that patiets will fid physicias matchig thei pefeed style of teatmet. Thee is easo to believe idividuals feel stogly about the choice of povides MCOs offe. Coce about limed choice of povides has eve pompted some states to eact laws esuig that willig physicias ae ot excluded fom maaged cae etwoks the so-called y Willig Povide laws, ad patiets have access to povides of thei choice Feedom of Choice laws. 47 The utily of policyholdes also depeds o the ualy of cae povided by the MCO. The ualy vaiable i this model captues the degee to which the MCO assists physicias i povidig health cae. It ca be thought of as a ualy-iceasig iput supplied by the MCO, such as diagostic tests o sophisticated health ifomatio pocessig, stoage, ad etieval. Maaged cae ogaizatios use vaious meas to cotol costs, fom pe-authoizatio of pocedues to utilizatio eview. While these ae meat to icease efficiecy ad decease the cost of health cae, they may also estict the povisio of health cae by physicias ad thus potetially affect the ualy of teatmet. Qualy issues have ot played a pomiet ole i two sided maket models to date, as studies have focused maily o the ced cad idusty ad 47 Some estictios apply eve ude y Willig Povide laws. Povides have to have a cetai ualy cetificatio ad have to be willig to accept the same cotactual codios eimbusemets, pe-authoizatio etc. as eolled physicias of the same ualy. 76

77 electoic platfoms. 48 Howeve, ualy of sevice is a cical issue i health cae, pehaps moe impotat tha i most othe idusties, ad hece mes caeful attetio. Thee is a cotiuum of physicias of mass N d > that diffe i thei cost of teatig patiets c μ μc, whee C > is the highest cost icued by ay docto fo teatig a sigle patiet. The factio μ [0,] of this maximum cost icued by type μ physicias is distibuted accodig to the cumulative distibutio fuctio Gμ, wh coespodig desy fuctio, gμ, which is assumed to be twice cotiuously diffeetiable ad posive eveywhee. 49 To focus o the ualy povided by the MCO, I assume that doctos do ot diffe i tems of ualy. To this ed, I also assume that doctos act i the best eest of thei patiets ad do ot egage i skimpig loweig the ualy of sevice they povide o dumpig the pactice of efusig to teat high cost patiets. The utily that a physicia deives fom teatig a patiet v μ is the diffeece betwee the eimbusemet paid by the MCO i the fom of a fee fo sevice, ad the cost of teatmet cμ 50 v μ c μ. 4-2 The MCO does ot obseve patiets type o physicias cost of teatmet. Howeve, the distibutios of patiet ad docto types ae commo kowledge. Patiets Decisio Makig If they choose to do so, idividuals ca secue health cae sevices fom a alteative povide, called pla. Pla povides sevices of ualy, ad access to a etwok of exceptio is the study by Pezzio ad Pigatao [2007]. The cost cμ captues both moetay ad o-moetay costs of teatmet. Fo simplicy, I assume doctos have costat magial costs of teatig patiets. The esults of the model would ot chage if the MCOs paid physicias a fixed amout pe yea pe eollee egadless whethe idividuals seek teatmet o ot capatio, athe tha a fee fo sevice. 77

78 physicias of size, i exchage fo a pemium P. Pla might be viewed as a tadioal isuace pla which gives eollees access to all the doctos i the maket o Medicae fee fo sevice FFS, whose pemium, ualy, ad umbe of physicias the MCO takes as give. I assume pemiums ae sufficietly high that patiets choose ot to joi both plas, ad the MCO fids pofable to offe a lowe ualy of sevice ad umbe of doctos i ode to attact idividuals wh lowe pobabily of gettig ill. To avoid cofusio, i what follows I will efe to the MCO as pla o MCO, ad idex s chaacteistics accodigly. Patiets joi MCO if they deive a highe level of expected utily fom joiig tha fom joiig pla U P U P. 4-3 Give the alteative offeed by pla, the MCO chooses to povide a lowe ualy of sevice etwok size combiatio such that attacts idividuals wh lowe pobabily of gettig sick. 4-4 MCO chages a lowe isuace pemium tha pla, othewise o patiets will joi MCO. Theefoe, thee exists 0, fo which idividuals ae idiffeet betwee joiig MCO ad joiig pla P P P, P,,,,. 4-5 Patiets of lowe health isk joi MCO, while patiets of highe health isk > joi pla. Empiical evidece suggests that maaged cae plas have bee successful i attactig a mix of patiets wh lowe health isk tha tadioal health isues Mille ad Luft [994], Glied [2000], Deb ad Tivedi [2006], ad Liu ad Zimme [2006] ad thei isuace pemiums ae ofte substatially lowe ltma, Cutle, ad Zeckhause [2003]. 78

79 Physicias Decisio Makig I assume physicias face o capacy costas. Coseuetly, they eoll i the etwok of MCO if the utily they deive fom teatig patiets is oegative v μ c μ Oly physicias fo which the moetay ad o-moetay cost of teatig patiets is lowe tha the eimbusemet pe patiet μ will joi the MCO s pefeed etwok. The umbe C of physicias that joi MCO is thus N d. 4-7 C G I assume MCO does ot obseve the cost of teatmet of each physicia ad caot pefeetially diect patiets towads cetai physicias e.g., those that have the lowest cost of teatmet. Moeove, patiets ae eually likely to go to ay physicia because teatmet is fee oce the pemium has bee paid, ad physicias ae assumed to be of the same ualy. Theefoe, physicias eollig i the pefeed etwok of MCO expect to eually shae cases i the MCO wh the othe eolled physicias. The total utily a physicia of type μ expects to get fom joiig MCO is the poduct of the expected utily pe patiet v ad the expected case load D N p V μ v μ D μc f d. 4-8 G 0 Physicias utily thus depeds o the umbe ad type of eollees. Idividuals do ot take this idiect extealy o accout whe decidig whethe to eoll i the MCO. Pof Maximizatio I assume MCO is a fo-pof MCO, ad thus maximizes s pofs give by 79

80 80 [ ] Π 0 d f k P N p, 4-9 whee k is MCO s pe patiet cost of povidig ualy, which is iceasig ad covex i. The fist ode codios chaacteizig MCO s pof maximizig choice of pemium, eimbusemet, ad ualy ae give by 0 Π p dp d f k dp d F P F N P Π p d d f k d f d d F P N ' Π p d d f k d f k d d F P N 4-2 whee P P P dp d 4-3 P P P P d d P P P P d d ae the total deivatives of wh espect to P,, ad. Sufficiet codios fo pof maximizatio ae povided i ppedix. Euatios 4-0, 4-, ad 4-2 eflect the familia micoecoomic paadigm that the pof maximizig fim chooses the isuace pemium, physicia eimbusemet, ad ualy such that the magial beef of each istumet euals s magial cost. Fo example, iceasig ualy allows MCO to attact moe idividuals p d d F N fom which collects pemium P, a

81 factio of which will eed teatmet which costs k, i addio to the iceased costs of povidig ualy to all policyholdes ' k N p f d Euatio 4-2. While these esults ae uive, they diffe fom the familia micoecoomic theoy of oe-sided makets though the pesece of idiect extealy effects. The pof maximizig pemiums, eimbusemets, ad ualy deped o the idiect extealy physicias exet o policyholdes, ad the extealy exeted by policyholdes o doctos. Whe decidig whethe to joi MCO, idividuals do ot take o accout the effect thei decisio has o the utily of doctos i the MCO s etwok. Similaly, physicias do ot take o accout the added beef policyholdes would ejoy fom beig able to choose amog a lage etwok of povides. The fist ode codios ca be ewte i the familia Ramsey fom 0 whee P k P η, 4-6 F P η 4-7 P F is the elasticy of the umbes of eollees wh espect to the isuace pemium. The moe elastic is the umbe of eollees wh espect to chages i the isuace pemium the lowe will be the makup chaged by MCO. Physicia eimbusemet has take the place that usually belogs to the magial cost of teatmet i oe-sided maket models. The utily of policyholdes depeds o the eimbusemet paid to doctos by MCO though s effect o the umbe of doctos i the pefeed etwok g C N d C

82 Similaly, the utily of doctos depeds o the isuace pemium povided by MCO though s effect o the umbe ad type of policyholdes N p F d. dp Two-sided maket models so fa have focused o the optimal picig decisios of emediaies. The peset model also aalyzes the optimal choice of ualy of the emediay MCO. The utily of physicias fom joiig MCO depeds idiectly o the ualy of sevice povided by MCO to patiets though s effect o the umbe ad type of policyholdes F d d Euatio 4-2. Combiig the fist ode codios fo pof maximizatio yields d dp F 0 d d f d k ' d d f d This i tu ca be ewte to aalyze the tadeoffs faced by MCO whe choosig the ualy of sevice ad physicia eimbusemet k ' P cst cst Iceasig the ualy of sevice povided to patiets allows the MCO to educe the eimbusemet pe patiet pays doctos, chage the same isuace pemium ad attact the same umbe of patiets. Similaly, iceasig the eimbusemet attacts moe doctos which povide policyholdes addioal utily, allowig the MCO to educe the ualy of sevice offes ad maai the same umbe of patiets ad isuace pemium. Usig Euatios 4-4 ad 4-5, Euatio 4-20 ca be futhe ewte as 82

83 83 cst P cst k '. 4-2 The highe the magial cost of povidig ualy ' k ad the lowe the elasticy of the umbe of doctos wh espect to eimbusemets σ, the moe the MCO ca educe paymets to s doctos whe iceases ualy ad maai the same pemium ad umbe of eollees. lso, the moe eollees cae about ualy highe ad the less they cae about the umbe of doctos lowe, the moe the MCO ca educe eimbusemets whe iceasig ualy ad keep the same pemium ad umbe of eollees, paticulaly at low levels of ualy elative to eimbusemet. Similaly, the fist ode codios ca be ewte to aalyze the tadeoffs faced by MCO whe choosig the ualy of sevice ad the isuace pemium cst cst P P F d f k 0 ' The highe the magial cost of povidig ualy fo the aveage policyholde, the moe the MCO has to icease the isuace pemium to be able to pay the same eimbusemet, ad maai the same umbe of doctos ad eollees. Usig Euatios 4-3 ad 4-5 Euatio 4-22 ca be ewte as cst cst P F d f k 0 ' y iceasig ualy, MCO ca aise the isuace pemium moe if the magial idividual has a highe pobabily of becomig ill ad if patiets cae moe about the ualy of sevice

84 highe, ad still maai the same umbe of policyholdes, pay the same eimbusemet, ad keep s etwok of physicias. Fially, the fist ode codios ca also be used to aalyze the elatio betwee physicia eimbusemet ad the isuace pemium f d P F P cst cst The highe the aveage health isk of policyholdes, the moe the MCO has to icease the isuace pemium if wats to attact moe physicias by iceasig eimbusemets, ad maai the same ualy of sevice. Usig Euatios 4-3 ad 3-4, Euatio 4-24 ca be futhe ewte as 0 f d F P cst cst icease i eimbusemets allows the MCO to aise the isuace pemium moe whe patiets cae moe about the umbe of physicias i the pefeed etwok, ad whe the supply of physicias is moe esposive to iceases i eimbusemets. Iso-Elastic Distibutios of Health Risk ad Cost The model is solved i ppedix assumig iso-elastic distibutios of patiet ad physicia types ad costat magial costs of povidig ualy F, σ ' G μ μ, k γ These powe distibutios ae a coveiet way to summaize the cocetatio of high-isk patiets ad high-cost physicias i the maket adey ad Rochet [2006]. Distibutios wh highe domiate those wh lowe i the sese of fist ode stochastic domiace. The highe 84

85 85 the elasticy of the distibutio of patiet types, the highe the umbe of illess cases. Similaly, the highe the elasticy of the distibutio of physicia types σ, the highe the umbe of doctos wh high cost of teatig patiets. Solvig the model yields the followig solutio see ppedix fo deivatios σ σ σ σγ d N C 4-27 σ σ σ σ σ σγ C N d 4-28 σ σ σ σγ σγ d N C 4-29 ] [ σ σ σ σ σ σγ σ σ σ σγ σ σ d d N C N C P P 4-30

86 σ σp σ σ σγ C N σ d σ. 4-3 The followig poposios descibe the impact of chages i paametes of eest o MCO s eimbusemet, ualy, umbe of doctos, magial health isk, ad isuace pemium. They ae summaized i Table 4-. The poofs of these poposios ae sketched i the appedix. The esults wee deived usig Mathematica 5. sepaate file detailig the deivatios is available fom the autho upo euest. Poposio. Chages i the Magial Utily of Qualy ad the Extealy Exeted by Doctos o Patiets The MCO povides moe of the ualy iceasig iput, pays highe eimbusemets, ad attacts moe doctos whe idividuals cae moe about ualy highe ad/o the umbe of doctos i the etwok whe is lage ad thus the extealy exeted by doctos o patiets is geate. The magial health isk isued by the MCO deceases as moe idividuals choose the alteative pla that povides highe ualy ad access to moe physicias. Poof: see ppedix. Whe idividuals cae moe about ualy, the MCO povides moe of the ualy iceasig iput. This iceases the magial utily of doctos, so MCO pays highe eimbusemets ad attacts moe doctos. Similaly, the idiect extealy exeted by doctos o patiets does ot affect solely the umbe of doctos i MCO s etwok. Whe policyholdes cae moe about the umbe of doctos the MCO fids pofable to povide doctos wh moe of the iputs they eed to bette teat patiets. Howeve, if idividuals cae 86

87 moe about ualy o access to doctos moe of them will choose the alteative pla that povides highe ualy of sevice ad access to moe physicias. Poposio 2. Chages i the Distibutio of Teatmet Costs The MCO educes the isk of s mix of patiets whe the elasticy of the supply of physicias wh espect to eimbusemets iceases σ is highe. Poof: see ppedix. I the model, σ captues both the cocetatio of doctos wh high teatmet costs, ad the elasticy of the supply of physicias wh espect to eimbusemet. Just as fims chage lowe pices whe demad fo thei poducts is moe elastic, so does the MCO have to pay highe eimbusemets to attact doctos whe the supply of doctos is moe elastic. Distibutios of docto types wh highe values of σ domiate those wh lowe values i the sese of fist ode stochastic domiace. Thee is moe mass cocetated at highe levels of teatmet cost. It is moe costly fo the MCO to attact physicias. Coseuetly, the MCO educes the health isk of s patiet mix ad isues fewe idividuals. The effect of a icease i σ o eimbusemet, the umbe of doctos, ad the ualy povided by the MCO is ambiguous. Deceasig eimbusemets o keepig them costat may be pof maximizig if the umbe of doctos does ot decease by much ad the willigess to pay of policyholdes does t decease too much. If a decease i eimbusemet would lead to a lage decease i the umbe of doctos ad i the policyholdes utily ad willigess to pay, the the MCO may fid pofable to icease eimbusemet, eve if the et effect is still a eductio i the magial health isk isued by the MCO. 87

88 Poposio 3. Chages i the MCO s Cost of Povidig Qualy MCO povides less of the ualy iceasig iput, pays lowe eimbusemets, attacts fewe doctos, chages a lowe isuace pemium, ad isues idividuals wh lowe health isk whe s magial cost of povidig ualy γ iceases. Poof: see ppedix. The MCO deceases eimbusemets ad attacts fewe doctos because doctos ae less efficiet whe they have less of the ualy iceasig iput at thei disposio, ad the magial utily deived by policyholdes fom access to doctos deceases. The demad fo maaged cae shifts dowwads, as idividuals willigess to pay fo maaged cae deceases. The isuace pemium deceases as a esult, but the decease does ot fully compesate fo the decease i policyholde s utily due to lowe ualy ad fewe physicias. Thus, the MCO educes the isk of s patiets mix ad isues fewe people i ode to avoid povidig the moe costly ualy. Of paticula impotace is the way i which the distibutio of health isks i the populatio affects the isuace pemium, eimbusemet, ualy povided, as well as the umbe ad mix of patiets seved by the MCO. Moe people ae at isk of becomig ill as a esult of the ageig of the US populatio. I the model this coespods to a shift i the distibutio of health isks towads highe health isks, captued by a highe value of. The distibutio of health isks fo highe statistically domiates those wh lowe i the sese of fist ode stochastic domiace. Compaative statics wh espect to ca illustate the effects of populatio ageig, o allow fo compaisos betwee makets wh diffeet distibutios of health isks. 88

89 Poposio 4. Chages i the Distibutio of Health Risks Whe the health isk of the populatio iceases the MCO povides lowe ualy, pays lowe eimbusemets, attacts fewe physicias, chages a lowe isuace pemium, ad fids pofable to attact some idividuals wh highe health isk. Poof: see ppedix. Faced wh a highe umbe of illess cases the MCO ties to cotol costs by educig ualy, payig lowe eimbusemets, ad povidig access to fewe doctos. Thus, the model ca explai the gowig public dissatisfactio wh the ualy of health cae povided by maaged cae ogaizatios ad thei attempts to cotol costs though a vaiety of mechaisms such as madatoy efeals ad pe-authoizatio pocedues. The MCO isues some idividuals wh highe health isk because fewe low-isk idividuals emai. ecause the policyholdes willigess to pay deceases whe ualy ad access to physicias ae educed the MCO chages a lowe isuace pemium. Poposio 3 descibes the ole played by the idiect extealy exeted by doctos o policyholdes, as well as othe factos, i detemiig the magude of these chages. Poposio 5. Magude of Chages Due to Iceased Populatio Health Risk ad Magial Cost of Qualy The pecetage deceases i MCO s ualy, eimbusemet, ad umbe of doctos due to iceases i populatio health isk o i the magial cost of ualy povisio ae geate whe people cae moe about ualy highe, the extealy exeted by doctos o patiets is geate highe, ad the cocetatio of doctos wh high teatmet costs is highe highe σ. 89

90 The deceases due to iceased populatio health isk ae lowe i populatio that had high health isk to stat wh highe iial. 5 Poof: see ppedix. Poposio showed that the MCO povides highe ualy ad access to a wide etwok of physicias i makets i which idividuals cae moe about ualy ad access to physicias. Poposio 5 shows that these ae also the makets i which the MCO educes ualy ad s etwok of physicias moe to cotai costs whe the populatio health isk iceases fo easos such as populatio ageig. Poposio 6. Chages i the Numbe of Doctos i the Maket The MCO pays highe eimbusemets, attacts moe doctos, povides moe of the ualy iceasig iput, isues moe policyholdes, ad chages a highe isuace pemium whe the umbe of doctos i the maket N d iceases. Poof: see ppedix. The MCO pays s doctos highe eimbusemets whe the umbe of doctos i the maket iceases because the same icease i eimbusemets attacts moe doctos i MCO s etwok. This i tu iceases the utily of policyholdes, moe of whom eoll i maaged cae. The isuace pemium iceases as a esult of the icease i the policyholdes willigess to pay. We have assumed that doctos have costat magial cost of teatig patiets ad they joi the MCO if the eimbusemet they eceive coves thei cost of teatmet. Havig moe doctos i the etwok deceases the umbe of patiets teated by each docto. If the doctos 5 The extealy exeted by the eollmet of a addioal docto i MCO s etwok, the magial utily of policyholdes wh espect to the umbe of doctos, iceases whe iceases if the umbe of doctos i the etwok is geate tha oe ssumptio 4-63 i the ppedix. Similaly, ssumptio 4-64 i the ppedix isues that the magial utily of ualy iceases whe iceases. 90

91 pe patiet cost of teatmet depeds o the umbe of patiets they have to teat, this diect extealy may egatively affect doctos by iceasig thei cost of teatmet. Coseuetly, the chage i eimbusemet ad umbe of doctos i MCO s etwok esultig fom a icease i the umbe of doctos i the maket will deped o the elative magude of the diect ad idiect extealy. Poposio 7. Chages i the Maximum Cost of Teatmet The MCO pays lowe eimbusemets, attacts fewe doctos, povides less of the ualy iceasig iput, isues fewe policyholdes, ad chages a lowe isuace pemium whe the cost of teatmet icued by doctos iceases i the sese of a icease i the maximum cost of teatmet C. Poof: see ppedix. While the decease i the isuace pemium chaged by the MCO is somewhat supisig, is due to the absece of icome effects i the model, ad to the fact that the alteative pla is o-stategic ad the MCO takes s ualy, etwok of doctos, ad isuace pemium as give. This lims the MCO s abily to icease s isuace pemium. The MCO the esots to ualy eductios ad educed access to physicias to cutail costs. This famewok is appopiate fo aalyzig the behavio of maaged cae ogaizatios give the choices made by the Cete fo Medicae ad Medicaid Sevice egadig tadioal Medicae FFS. Futue eseach should model the stategic eactio betwee health isues to study also the alteative pla s choice of ualy, umbe of doctos, ad isuace pemium. Coclusio Recet developmets i the ecoomics of etwoks have show the potetial fallacies of usig oe-sided logic i two-sided makets. This pape has developed a two-sided maket model 9

92 of maaged cae to aalyze the picig ad ualy decisios of a pof maximizig MCO i the pesece of idiect etwok extealies betwee doctos ad patiets. Maaged cae diffes fom othe two-sided makets though the fact that the emediay s expected cost of povidig sevice to eollees is liked to the expected beef they deive fom joiig though the pobabily of gettig ill. The MCO faces tadeoffs whe choosig ualy, pemiums, ad eimbusemets, tadeoffs that deped o the distibutio of patiets health isk ad physicias cost, the elasticy of supply of physicias wh espect to eimbusemets, the magial cost of sevice ualy, the utily deived by patiets fom the ualy of health cae sevices, ad the magude of the idiect extealy exeted by doctos o patiets. I the case of iso-elastic distibutios of patiet health isk ad physicia cost of teatmet, a icease i the cost of povidig ualy deceases the ualy povided by the MCO, which educes the effectiveess of physicias, the magial utily deived by policyholdes, ad thus the eimbusemet ad the umbe of doctos i the pefeed etwok. The demad fo maaged cae sevices shifts dowwad, ad the isuace pemium also deceases. Howeve, the decease i pemium is smalle tha the decease i patiet utily due to lowe ualy ad umbe of physicias i the etwok. Thus, the MCO educes the health isk of s patiet mix, ad avoids povidig, at least i pat, the moe costly ualy. Fo populatios moe at isk of becomig ill, as is the case of the ageig populatio of the Ued States, the MCO povides sevices of lowe ualy, pays lowe physicia eimbusemets, icludes fewe povides i s pefeed etwok, ad yet fids pofable to isue some highe isk idividuals. lthough MCOs povide sevices of highe ualy ad access to moe doctos i makets whee idividuals cae moe about ualy ad access to doctos, these makets ae also the oes 92

93 i which the MCO educes ualy ad access to physicias moe aggessively to cutail costs whe the cost of ualy povisio o populatio health isks icease. These esults ca explai the iceasig public dissatisfactio wh maaged cae ualy ad udescoe the impotace of implemetig ad mooig the achievemet of ualy stadads, as well as adjustig the capatio ates paid by govemet pogams like Medicae ad Medicaid to accout fo health isk. While most of the eseach o two-sided makets has so fa bee theoetical, thee is a gowig empiical two-sided maket leatue Rysma [2004], Rysma [2007]. Yet to my kowledge thee is o empiical study aalyzig the two-sided maket aspects of maaged cae. Give the potetial impotat implicatios of idiect extealies, empiical studies would be useful to gauge the elative magude ad the ole played by idiect extealies i health cae makets. 93

94 PPENDIX EXPLNTORY ND INSTRUMENTL VRILES USED IN CHPTER 2, THEIR SOURCES, ND THE ESTIMTION METHOD Defiio of Explaatoy Vaiables ad Data Souces REL GDP PER CPIT Real GDP pe capa expessed i 995 costat USD WDI 52 MIN LINES PER CPIT Numbe of mai lies pe capa ITU 53 WITING LIST COMPETITION SEQUENTIL ENTRY SIMULTNEOUS ENTRY NLOG DIGITL ONLY Ratio betwee egisteed applicatios fo a mai lie ad the umbe of mai lies i opeatio ITU Dummy vaiable evey yea afte the oductio of two o moe digal mobile commuicatios opeatos GM ad GW 54 Dummy vaiable evey yea afte the oductio of competio, if a sigle digal mobile opeato was peset i the maket fom the begiig of digal commuicatios adoptio GM ad GW Dummy vaiable evey yea afte the oductio of competio, if two o moe digal mobile opeatos wee peset i the maket fom the begiig of digal commuicatios adoptio GM ad GW Dummy vaiable if oly aalog techology was oduced i the couty GM ad GW Dummy vaiable evey yea afte the oductio of digal mobile commuicatios if the couty did ot stat adoptig mobile commuicatios wh aalog techology GM ad GW 52 WDI: Wold ak, Wold Developmet Idicatos Database 53 ITU: Iteatioal Telecommuicatio Uio, Wold Telecommuicatio Idicatos Database 54 GM ad GW: Ifoma UK Ltd., Global Mobile; Cai Commuicatios Ic., Global Wieless 94

95 Istumetal Vaiable Defiios ad Ratioale fo Usig Them TIME Numbe of yeas sice 989. I geeal, competio was moe likely to be oduced duig the latte yeas. This istumet also captues the ted i the umbe of fixed lies pe capa ad i the factio of people waig fo a fixed lie. POPULTION Couty populatio WDI. Moe populous couties wee moe likely to oduce competio ealie, ad teded to oduce competio simultaeously. TVs PER CPIT Numbe of televisio eceives pe capa ITU. This vaiable is a good istumet fo the umbe of fixed lies pe capa. Fome socialist couties had elatively low umbes of televisio eceives pe capa whe commuism fell. The umbe of televisio eceives iceased cosideably aftewads, much like the umbe of fixed telephoe lies. TDSGNI Total debt sevice as a factio of GNI WDI. This vaiable ca seve as a idicato of how attactive a couty is. Fo iche couties, total debt sevice epesets a lowe factio of GNI, ad iche couties teded to oduce competio ealie, ad simultaeously. ut this vaiable may also captue the degee to which govemets wee cash costaied. Cash costaied govemets had to pomote ecoomic efoms, especially pivatizatio, ad had geate icetives to awad cellula liceses. GVTEXP Govemet expedue as a factio of GDP WDI. highe factio of govemet spedig i GDP is chaacteistic fo couties i which efoms ad the pivatizatio pocess did ot wok well, ad the public secto played a impotat ole. These couties wee geeally less attactive to foeig ivestos. OPEN Ratio of expots impots ove GDP WDI. Thee is evidece that foeig diect ivestmet espoded posively to the tade policy of fome socialist couties Deichma et. al [2003]. STKS Factio of bak assets held by state-owed baks Sheif et. al [2002]. 55 highe factio of state-owed bak assets geeally meas highe govemet cotol o ecoomic activy. It is the vaiable that is most 55 Missig values of STKS ad othe istumetal vaiables wee eplaced by lags, whee available. This does ot lead to biased estimates. 95

96 coelated wh the waig list fo fixed lies. Oe of the easos why telecommuicatios i fome socialist couties wee udedeveloped, compaed to othe utily idusties, was the desie of the ulig paty to cotol the etie society. Phoe tappig was commo pactice i these couties, ad a highe umbe of fixed lies meat less govemet cotol. Couties wh a lowe factio of state-owed bak assets wee moe successful i oducig efoms, ad i attactig foeig ivestos. DISTRUX Distace fom uxelles to the capal of each couty Rad McNally New Milleium Wold tlas [200]. Couties close to the Euopea Uio wee moe developed, moe successful i oducig efoms, ad moe attactive makets. CLORIE Numbe of caloies pe capa pe day FO. 56 Captues the level of developmet of each couty, as well as cultual factos. Istumetal Vaiables Estimatio ll istumets ad othe exogeous vaiables have bee used to estimate fist stage log models fo the competio vaiables. The pseudo R suae measues of goodess of f ae 0.63 fo the oductio of competio, 0.47 fo the oductio of simultaeous competio, ad 0.50 fo the oductio of seuetial competio. 57 The fted pobabilies wee the used i the secod stage as istumets togethe wh iial istumets ad the exogeous vaiables, i ode to obtai coect estimates of the coefficiets stadad eos. The use of fted pobabilies i the secod stage togethe wh the iial istumets povides moe efficiet estimates, because both liea ad oliea combiatios of the iial istumets ae exploed. 56 Food ad gicultue Ogaizatio 57 The fist stage esults ae omted fom the pape as they would euie too much space. They ae available fom the autho upo euest. ll the fist stage egessios, icludig those fo the umbe of mailies pe capa ad the legth of the waig list, wee statistically sigificat. The smallest F statistic was sigificat at % level of cofidece. 96

97 97 PPENDIX DERIVTION OF THE MIN RESULTS IN CHPTER 4 Iso-elastic Distibutios of Health Risk ad Teatmet Cost Deivatio of the Pof Maximizig Solutio To bette udestad the esults, the model is solved assumig iso-elastic distibutios of patiet ad physicia types F ad σ c c G, ad costat magial costs of povidig ualy k γ '. It is easiest to expess the isuace pemium chaged by the MCO i tems of ualy, eimbusemet, ad the cutoff pobabily fom Euatio 4-5 ad solve the model wh espect to ualy, eimbusemet, ad the cutoff pobabily of illess. We have P P The MCO s pof is [ ] Π 0 d f k P N p Replacig f i Euatio 4-33 ad egatig yields Π p k P N The fist ode codios wh espect to,, ae [ ] 0 Π p k P N Π σ p N ' Π p k N Simplifyig, we get 0 k P. 4-38

98 98 0 σ ' k Combiig Euatios 4-39 ad 4-40 we get ' k σ. 4-4 Takig o accout that k γ ', we ca expess ualy i tems of eimbusemet σγ Replacig Euatios 4-42 ad 4-7 o Euatio 4-39 ad solvig fo eimbusemet yields σ σ σ σγ d N C ecause d N C σ we ca compute the umbe of doctos i the pefeed etwok d d N N C C σ σ σ σ σγ Replacig the expessio fo the eimbusemet fom Euatio 4-43 o Euatio 4-42 yields the followig expessio fo the ualy povided by MCO

99 99 σ σ σ σγ σγ d N C Substutig Euatios 4-43, 4-44, ad 4-45 o Euatio 4-38 ad solvig fo the magial health isk of MCO s patiets yields σ σ σ σγ σ σ σ d N C P Fially, substutig i Euatio 4-32 yields the solutio fo the isuace pemium ] [ σ σ σ σ σ σγ σ σ σ σγ σ σ d d N C N C P P Sufficiet Codios fo Pof Maximizatio Note that the deomiato i Euatios 4-46 ad 4-47 ca be wte as [ ] 0 > σ σ σ σ D, 4-48 whee the secod eualy comes fom Euatio The deomiato is posive sice MCO offes lowe ualy ad umbe of doctos tha the alteative pla, ad so ae ad P as a esult. We also eed

100 00 < σ σ σγ σ σ P 4-49 to guaatee that <. The secod ode deivatives of MCO s pof fuctio wh espect to,, ad ae [ ] Π σ p k P N Π σ σ p N 4-5 Π 2 2 '' p k N Π σ p N ' 2 Π p k N Π σ p N Takig Euatio 4-38 o accout, Euatio 4-50 ca be wte < Π p P N The Hessia matix of the MCO s pof fuctio is '' σ σ σ σ p p p p p k N N N N P N H. 4-57

101 0 The diagoal elemets of the Hessia matix ae egative if 0 ' ' k, 0 < <, 0 < < σ, ad 0 < <, 4-58 that is, if the cost of povidig ualy is covex, ad the utily of eollees exhibs dimiishig etus to ualy ad eimbusemet. Futhemoe, all the 2 2 detemiat mios ae posive ude these assumptios if the utily of policyholdes also exhibs deceasig etus to scale, that is if > 0 σ The fact that the 2 2 detemiat mios ae posive is obvious wh the exceptio of the oe coespodig to the secod deivatives wh espect to ualy ad eimbusemet, which ca be wte as [ ] 0 '' '' > σ σ σ σ σ σ σ σ p p p p p k N k N N N N H Det Ude the codios i Ieualies 4-58 ad 4-59 the Hessia matix i Euatio 4-57 is egative defie. These codios togethe wh the fist ode codios i Euatios 4-35, 4-36, ad 4-37 ae sufficiet codios fo pof maximizatio. The followig assumptios o the paametes ae made i addio to the sufficiet codios fo maximizatio C >, N d > 4-6 σ γ d N C > 4-62 σ σ γ < d N C 4-63

102 C σ < γ σ σ σ N d ssumptio 4-62 is eeded to guaatee that 0 < G <. ssumptio 4-63 C C esues that > ad the utily of policyholdes is highe fo highe values of. This allows us to epet a icease i as a icease i the extealy exeted by doctos o patiets. Similaly, ssumptio 4-64 guaatees that > ad policyholdes deive a highe utily fom ualy whe iceases. Ieualies 4-62, 4-63, ad 4-64 ca be simultaeously satisfied if σ > 0 ad the magial cost of the ualy iceasig iput is ot too lage γ < N d Ude all these assumptios, the impact of chages i paametes of eest o the MCO s eimbusemet, ualy, umbe of doctos, magial health isk, ad isuace pemium is summaized i Table 4-. The followig sectio sketches the poofs of the mai poposios. The esults wee deived usig Mathematica 5. Fo bevy, oly the mai esults of the deivatios ae peseted. sepaate file detailig the deivatios is available fom the autho upo euest. Poof of Poposio. Chages i the Magial Utily of Qualy ad the Extealy Exeted by Doctos o Patiets Diffeetiatig Euatios 4-43 though 4-47 wh espect to ca be show that σ l > 0 σ l σ σ > 0 σ σ l σ >

103 2 P P σ l l σ < {[ σ l σ l ] σ } σ σ σ Oe would expect the MCO s isuace pemium to icease whe policyholdes cae moe about ualy highe because the MCO s ualy ad umbe of doctos icease ad the magial health isk deceases. The chage i MCO s isuace pemium is ambiguous because the utily of the alteative pla also iceases whe patiets cae moe about ualy. small eough decease i eimbusemet coupled wh small iceases i ualy ad umbe of doctos ca lead to a decease i the magial health isk whe the alteative pla s ualy ad umbe of doctos ae lage eough. Diffeetiatig Euatios 4-43 though 4-48 wh espect to to study the effects of a icease i the extealy exeted by doctos o patiets yields l > 0 σ σ l > 0 σ l σ σ > 0 σ P P σ σ l l σ 2 P < [ σ σ l σ l ] σ σ σ σ { σ σ } σ σ The chage i MCO s isuace pemium whe policyholdes cae moe about access to doctos highe is ambiguous fo easos simila to those fo which the chage i MCO s 03

104 isuace pemium is ambiguous whe policyholdes cae moe about ualy highe. The utily fom joiig the alteative pla also iceases. Poof of Poposio 2. Chages i the Distibutio of Teatmet Costs Diffeetiatig Euatios 4-43 though 4-47 wh espect to σ yields l lc σ 4-76 σ σ σ l lc l σ 4-77 σ C σ σ l lc 4-78 σ σ σ σ 2 2 P P σ σ lc l < 0 σ [ σ lc l ] σ σ σ σ The sig of the deivatives depeds o the magude of l C l, wh the exceptio of the cutoff health isk. The MCO educes the magial health isk isues whe the cocetatio of high teatmet cost doctos iceases. Poof of Poposio 3. Chages i the Cost of Povidig Qualy Diffeetiatig Euatio 4-45 wh espect toγ, we see that the MCO povides less of the ualy iceasig iput whe the magial cost of ualy povisio iceases γ σ < γ σ The eimbusemet paid to physicias also deceases γ < γ σ 04

105 The easo is that the eductio i the amout of the ualy iceasig iput povided by the MCO also dimiishes the magial utily of physicias. Theefoe, the umbe of physicias i the MCO s etwok also deceases γ σ < γ σ Wh lowe ualy ad access to fewe doctos the magial willigess to pay of policyholdes deceases ad so does the isuace pemium chaged by the MCO P γ 2 P σ σ γ σ [ σ σ ] 2 < Howeve, the decease is such that the MCO isues a mix of patiets wh lowe health isk, as ca be see by diffeetiatig Euatio 4-46 wh espect toγ ad simplifyig γ γ { σ } 2 < Fially, the MCO attacts a smalle umbe of idividuals N p F N p N p < γ γ γ Poof of Poposio 4. Chages i the Distibutio of Health Risks Diffeetiatig Euatios 4-43, 4-44, ad 4-45 wh espect to ca be show that < σ σ Whe the cocetatio of high-isk patiets iceases the MCO educes ualy ad icludes fewe physicias i s etwok by payig lowe eimbusemets to cotol costs. To see how the mix of patiets isued by the MCO chages whe the distibutio of heath isks chages, diffeetiate Euatio 4-46 wh espect to. Takig also the expessio fo eimbusemet fom Euatio 4-43 o accout we get 05

106 Fom Euatio 4-39 we have P σ [ σ ] [ σ σ ] σ σ Substutig Euatio 4-89 i Euatio 4-88 yields 2 2 σ P σ [ ] [ σ σ ] 2 > The deivative i Euatio 4-90 is posive because the ualy ad umbe of doctos povided by MCO is lowe tha that povided by the alteative pla. The MCO fids pofable to attact some highe isk idividuals because fewe idividuals wh low isk emai. 4-5 as To detemie how the isuace pemium chaged by the MCO chages, ewe Euatio P P. 4-9 Totally diffeetiatig Euatio 4-9 wh espect to we get P ecause > 0, < 0, ad P < 0 must be that < 0. Hece, the isuace pemium also deceases. Poof of Poposio 5. Magude of Chages Due to Iceased Populatio Health Risk ad Magial Cost of Qualy To show that the pecetage deceases i ualy, eimbusemet, ad umbe of doctos i MCO s etwok due to iceases i populatio health isk ae geate whe the extealy is geate, diffeetiate the absolute value of the deceases i Euatio 4-87 wh espect to 06

107 07 [ ] 0 2 > σ σ σ Similaly, oe ca show that the pecetage deceases ae geate whe - idividuals cae moe about the ualy of health cae sevice [ ] 0 2 > σ σ the elasticy of the supply of doctos wh espect to eimbusemets is highe [ ] 0 2 > σ σ σ 4-95 [ ] 0 2 > σ σ the cocetatio of high health isks i the populatio is smalle to stat wh 0 < σ σ To show that the pecetage deceases i ualy, eimbusemet, ad umbe of doctos i MCO s etwok due to iceases i the magial cost of povidig ualy ae geate whe the extealy is geate, diffeetiate the absolute value of the deceases i Euatios 4-8, 4-82, ad 4-83 wh espect to [ ] 0 2 > σ γ σ γ σ γ γ Similaly, oe ca show that the pecetage deceases ae geate whe - idividuals cae moe about the ualy of health cae sevice

108 08 [ ] 0 2 > σ γ σ γ σ γ γ the elasticy of the supply of doctos wh espect to eimbusemets is highe [ ] 0 2 > σ γ σ γ σ γ 4-00 [ ] 0 2 > σ γ σ γ. 4-0 Poof of Poposio 6. Chages i the Numbe of Doctos i the Maket Diffeetiatig Euatios 4-43 though 4-47 wh espect to N d yields 0 > σ d d d N N N > σ d d N N > σ d d N N > d d N P N P σ σ σ σ σ Poof of poposio 7. Chages i the Maximum Cost of Teatmet Diffeetiatig Euatios 4-43 though 4-47 wh espect to C yields 0 < σ σ C C C < σ σ C C < σ σ C C 4-08

109 P C P σ σ C σ σ σ 2 < The MCO pefes to educe ualy ad the umbe of doctos i s pefeed etwok to estai costs, eve though this meas has to chage a lowe pemium. 09

110 Table 4-. The effect of paamete iceases o maaged cae eimbusemet, ualy, umbe of doctos, magial health isk, ad isuace pemium Vaiables of Iteest Paametes Reimbusemet Qualy Numbe of doctos Cutoff pobabily Isuace pemium P Cocetatio of health isks i the populatio Impotace of ualy fo policyholdes - /- Idiect extealy paamete Impotace of umbe of doctos fo policyholdes Elasticy of supply of doctos wh espect to eimbusemet σ - /- /- /- /- - /- Magial cost of ualy γ Doctos maximum teatmet cost pe patiet C Numbe of doctos i the maket N d 0

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117 IOGRPHICL SKETCH Micea Ioa Macu gaduated i 998 wh a achelo of Sciece degee i ecoomics fom abe-olyai Uivesy i Cluj-Napoca Romaia, majoig i fiace ad bakig. He wet o to get a Maste of ts degee i uatative ecoomics fom the same uivesy the ext yea. I fall 999 Micea moved to udapest, Hugay to study Ecoomics at Cetal Euopea Uivesy. fte gaduatig wh a Maste of ts degee i 200, he moved to the Ued States to pusue doctoal studies i Ecoomics at the Uivesy of Floida. t the Uivesy of Floida, Micea specialized i idustial ogaizatio, micoecoomics, ad ecoometics. He was employed by the Depatmet of Ecoomics both as a teachig ad a eseach assistat. He was a istucto of maageial ecoomics i the summes of 2004, 2005, ad He also taught ecoomics of tasio ad Euopea Uio accessio, a uppe-level elective, i Fall 2005 ad Spig fte successful completio of all the euiemets fo the degee, Micea eaed the Docto of Philosophy degee i Decembe He seves as a eseache at the Uivesy of Floida Istute fo Child Health Policy ad as a cosultat to NCOM, the Potuguese Natioal Commuicatios uthoy. 7