In many cases, the benefit to a consumer of a product increases with the number of other users of the same product. These demand interdependencies are referred to in the literature as positive demand externalities or network externalities. This paper examines the dynamic pricing behaviors of an incumbent and a later entrant, with special attention to the impacts of demand externalities, compatibility, and competition on prices and profits. Defining market power as the ability to price above a competitor without losing market share, we show how demand externalities and installed base combine to confer market power. We model optimal pricing as a differential game with the optimal price trajectory established as Nash open-loop controls. For a duopoly durable goods market with strong demand externalities, the results show an increasing price trajectory can be optimal. As expected, a new entrant is better off if its products are compatible with those of the incumbent, especially when demand externalities are strong and the installed base of the incumbent is large. Less intuitively, the incumbent as well may be better off agreeing on common standards. The comparison of monopoly and duopoly shows that under strong demand externalities and a small installed base, the incumbent profits from compatible entry.diffusion, new products, dynamic pricing, duopoly competition, network externalities, compatibility, standards

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. American Marketing Association is collaborating with JSTOR to digitize, preserve and extend access toThe authors introduce a new estimation procedure, Augmented Kalman Filter with Continuous State and Discrete Observations (AKF(C-D)), for estimating diffusion models. This method is directly applicable to differential diffusion models without imposing constraints on the model structure or the nature of the unknown parameters. It provides a systematic way to incorporate prior knowledge about the likely values of unknown parameters and updates the estimates when new data become available. The authors compare AKF(C-D) empirically with five other estimation procedures, demonstrating AKF(C-D)'s superior prediction performance. As an extension to the basic AKF(C-D) approach, they also develop a parallel-filters procedure for estimating diffusion models when there is uncertainty about diffusion model structure or prior distributions of the unknown parameters. KalmanFilter Estimation o f New Product Diffusion Models The desire to forecast the diffusion of new products has inspired a large body of research during the past two decades. The accurate prediction of new product diffusions is critical in designing marketing strategies for new product planning and management. Before predicting sales, diffusion model specifications must be determined and parameters must be estimated. A variety of estimation methods for estimating diffusion models have been proposed. (For a review of the literature on these estimation techniques, see Mahajan, Muller, and Bass 1990.) In their article, Mahajan, Muller, and Bass (1990) classify diffusion model estimation procedures into two groups: time-invariant estimation procedures and timevarying estimation procedures. Time-invariant estimation procedures include the conventional estimation methods such as ordinary least square (OLS) (Bass 1969), maximum likelihood estimation (MLE) (Schmittlein and Mahajan 1982), and nonlinear least squares (NLS) (Srinivasan and Mason 1986). for their helpful suggestions. They also are thankful to JMR editor Vijay Mahajan and three anonymous reviewers for their insightful and constructive comments.(2) x(t)= [p + q n(t -1) i[m n(t -1)] = oi + a2n(t -1) + oa3n2(t -I), t = 1, 2,.... where x(t) is the number of new adopters in the tth interval, and 378 This content downloaded from 150.135.239.97 on Thu,

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-A/ etBill is a busincss niodcl. set of protocols, and software implementation for commerce in information goods and other network-delivered services. It has very low transaction costs for micropayments (around 1 cent for a 10 cent item), protects the privacy of the transaction, and is highly scalable. Of special interest is our new certified delivery mechanism which delivers information goods if and only if the consumer has paid for them. This article discusses the design of the NetBill protocol and our World Wide Web (WWW) prototype implementation.As the explosive growth of the Internet continues, more people rely on networks for timely information. However, since most information on the Internet today is free, intellectual property owners have little incentive to make valuable information accessible through the network. There are many potential providers who could sell information on the Internet and many potential consumers for that information. What is missing is an electronic commerce mechanism that links the merchants and the consumers.NetBill is a business model, set of protocols, and software implementation allowing consumers to pay owners and retailers of information. While NetBill will enable a market economy in information, we still expect that there will be an active exchange of free information. The Market for lnformationorat and others have shown that information industries dominate the economy [l]. Estimates of the market for P on-line information vary from U S 1 0 billion to US$100 billion per year depending upon how the market is defined [2]. There are more than 15,000 commercial databases accessible over networks. Vendors can distribute information products varying from complex software valued at thousands of dollars per copy, to journal pages or stock quotes valued at a few pennies each. A challenge for network-based electronic commerce is to keep transaction costs to a small fraction of the cost of the item. The desire to support micropayments worth only a few pennies each is a driving factor in the NetBill design.A second challenge in the information marketplace is supporting micromerchants, who may be individuals who sell relatively small volumes of information. Merchants need a simple way of doing business with consumers over networks, so that the costs of setting up accounting and billing procedures are minimal. A model for micromerchants is the French Minitel system, which provides 20,000 kiosks offering computer-based services to Minitel users. Many of these kiosks are provided by small entrepreneurs who enter the marketplace for little more than the cost of a PC and the labor to acquire or develop valuable information.The purchase of goods over a network requires linking two transfers: the transfer of the goods from the merchant to the consumer, and the transfer of money from the consumer to the merchant. In the case of physical goods, a consumer can order the goods and transfer money over the network, but the goods cannot be delivered over the network. Information goods have the spec...

The digitization of information goods necessitates a rethinking of their production and distribution economics. An N-good bundling model with multi-dimensional consumer preferences is developed to study the key factors that determine the optimal bundling strategy. Using analytical and empirical methods, mixed bundling is established as the dominant (i.e. profit maximizing) strategy. Pure unbundling is also shown to outperform pure bundling, even in the presence of some degree of economies of scale, if consumers positively value only a subset of the bundle components, which is the predominant case in the academic journal context. These results provide strong incentives for academic journal publishers to engage in mixed bundling, i.e. offer both individual articles and journal subscriptions, when selling and delivering over the Internet.