Interconnection among Electronic Academic Journal Platforms: Multilateral versus Bilateral Interconnection

1
Interconnection among Electronic Academic
Journal Platforms Multilateral versus Bilateral
Interconnection

• Doh-Shin Jeon (UPF, IESE (SP-SP),TSE)
• Domenico Menicucci (Universita di Firenze)

2
Some background about the market for academic
journals

• Move from print journals to electronic journals
  raises several fundamental issues
• (1) Move from ''no bundling and no
  discrimination' to ''bundling and
  discrimination'' Jeon-Menicucci (JEEA, 2006)
• (2) Open access journals Jeon-Rochet (2007)
• (3) Interconnection (interoperability) this
  paper

3
Several public reports on the market for academic
journals

• UK House of Commons Science and Technology
  Committee (2004)
• OECD (2005)
• Mathias Dewatripont etc. (2006)
• Commissioned by EC
• Section 9 is about interoperability

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Interactive electronic academic journals are
much more than print journals

• New technology for data and text mining, data and
  text linking (such as cross reference) etc.
  significantly increases the value added from
  interconnection among electronic journal
  platforms
• In biology, there is a software which can
  recognize a two-dimensional image of a molecule
  and search for all the articles studying the same
  molecule
• You can enhance the texts of an article by
  providing links to URLs or databases

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Future in biology

• One ultimate goal is automatically generated
  knowledge layers which will be overlaid on the
  electronic text and offer a quick route to
  connecting a paper with other relevant material
  whether it is genes, proteins, metabolic markers
  etc.
• (Martin Hofmann, Frauhofer Institute of
  Algorithms and Scientific Computing)

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Anti-competitive issue

• ''... RE might try to undermine its competitors
  by denying them links with ScienceDirect, ...'
• (U.K. Competition Commission (2001), p.22)

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CrossRef

• A not-for-profit citation linking backbone
  offering a reference linking service that allows
  users to click on a citation and be taken
  directly to the target content.
• A success story It has more than 1,462
  participating publishers and societies.
• It allows publishers to avoid bilateral linking
  agreements a single agreement with CrossRef
  serves as a linking agreement with all
  participating publishers

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Objective of this paper

• To compare the multilateral interconnection
  regime à la CrossRef with a bilateral
  interconnection regime in terms of
• Incentive to interconnect
• Profits
• Welfare

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Main results

• Publishers are fully interconnected under the
  multilateral interconnection regime but often
  partially interconnected under the bilateral one
  for exclusion or differentiation motives
• If partial interconnection occurs for
  differentiation motive, exclusion of small
  publisher(s) occurs more often under the
  multilateral interconnection than under the
  bilateral one

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Literature review

• Compatibility among networks Katz-Shapiro
  (1985), Farrell and Saloner (1985, 1986)
• Interconnection through two-way access pricing
  among telecommunication networks Armstrong
  (1998) and Laffont-Rey-Tirole (1998a,b) etc
• Interconnection among Internet Backbone companies
  (IBP) Crémer-Rey-Tirole (2000) and
  Laffont-Marcus-Rey-Tirole (2003)

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Our contribution to the literature

• To study a multilateral interconnection and to
  compare it with a bilateral one.
• Interconnection among academic journal platforms
• Application to Interconnection among Internet
  Backbone Companies (IBP)

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Model

• We build on Jeon-Menicucci (JEEA, 2006) Each
  publisher practices bundling
• Players 3 asymmetric profit-maximizing
  publishers and one representative library
• 3 games
• ?m Multilateral interconnection game à la
  CrossRef
• ?b Billateral interconnection game à la CrossRef
• ?0 game without interconnection

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Model
Multilateral Interconnection Bilateral Interconnection
Sequential timing O O
Simultaneous timing O X
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Timing of ?m (Multilateral interconnection game à
la CrossRef)
Sequential Interconnection
Simultaenous pricing
Stage 1
Stage 2
Stage 3
Stage 4
Stage 5
1 decides to be active or not and, if active,
x11 or x10
2 decides to be active or not and, if active,
x21 or x20
3 decides to be active or not and, if active,
x31 or x30
Each active i chooses Pi
The library chooses bundles to buy
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Timing of ?b (Bilateral interconnection game)
Simultaneous Pricing
Sequential Interconnection
Stage 1
Stage 2
Stage 3
Stage 4
Stage 5
1 decides to be active or not and, if active,
x1j1 or x1j0
2 decides to be active or not and, if active,
x2j1 or x2j0
3 decides to be active or not and, if active,
x3j1 or x3j0
Each active i chooses Pi
The library chooses bundles to buy
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Timing of ?0 (the game without interconnection)
Simultaneous Pricing
Sequential decision to be active or not
Stage 1
Stage 2
Stage 3
Stage 4
Stage 5
1 decides to be active or not
2 decides to be active or not
3 decides to be active or not
Each active i chooses Pi
The library chooses bundles to buy
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Interconnection

• yij1 (yij0) Platforms i and j are
  interconnected (not interconnected)
• Under the multilateral interconnection regime
  yij1 iff xi1 and xj1
• Under the bilateral interconnection regime yij1
  iff xij1 and xji1
• y(y12,y13,y23)

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Publishers

• Publisher is profit is Pi
• The fixed cost of making the first copy of an
  article was already incurred.
• Zero marginal cost of distribution.
• Zero cost of interconnection

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Library

• Has a fixed budget M(gt0) for journals
• Quasi-linear utility function
• Stand-alone utility from Bundle i
• U1gtU2gtU3gt0
• Additional utility from Interconnection
  (economies of scale) I12gtI13gtI23gt0
• Utility from buying bundles 1 and 2
• U1U2I12y12-P1-P2

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Assumptions and a tie-breaking rule

• Perfect information on utilities and budget
• MltU-I12 where U?U1U2U3 implies that the
  industry profit is equal to M
• A1 U1gtU2I23, U2gtU3I13 , U3gtI12
• Tie-breaking rule A publisher is active only if
  it expects to have a strictly positive profit.

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One basic result (Lemma 1)

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

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Pricing game given interconnection profile y
M
Only 1 can earn a positive profit equal to M
Only 1 and 2 can earn a positive profit. Their
profits do not depend on y
All three earn a positive profit. Profits depend
on y
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Duopoly prices

• Determined by
• They do not depend on interconnection profiles

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Prices when all three compete PiT(y)

• Determined by
• They depend on the interconnection profile
  P1T(y) increases with y12 and y13 and decreases
  with y23

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?0 (the game without interconnection)
M
A1
A1,2,3
A1,2
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One basic result regarding incentive to
interconnect

• y(y12,y13,y23)(1,0,0) is the least favorable
  for 3.
• If MgtM(1,0,0), 3 makes a positive profit for any
  interconnection profile
• Then, all publishers fully interconnect
  regardless of the mode of interconnection.
• Question What happens for M?M(1,0,0)?

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

• (0,1,0) is the most favorable interconnection
  profile for 3 under ?m
• If M?M(0,1,0), 3 cannot make a positive profit
  for any possible y under ?m. Hence, we consider
  MgtM(0,1,0).
• Lemma 3 For each publisher, interconnection is a
  best response and sometimes the unique one.

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?m (Multilateral interconnection game à la
CrossRef) Equilibrium
?0
A1,2,3
A1,2
M
A1,2,3
A1,2
?m
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?m (Multilateral interconnection game à la
CrossRef) Intuition

• More exclusion of 3 under ?m than under ?0 becase
  of the economies of scale
• Exclusion motive does not modify the incentive to
  interconnect
• - If 1 chooses x10, 2 and 3 respond by x2x31.
  Hence, x10 only worsens 1s relative standing.

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?b (Bilateral interconnection game) results

• If M?M(0,1,1), 3 cannot make a positive profit
  for any possible y under ?b. Hence, we consider
  MgtM(0,1,1).
• Main result Partial interconnections may arise
  for two different motives, exclusion or
  differentiation motive
• (1) Exclusion motive If 1 and 2 are similar but
  2 is much larger than 3, 1 or 2 excludes 3 by
  breaking connectivity with 3
• (2) Differentiation motive If 2 and 3 are
  similar but 1 is much larger than 3, 1 breaks
  connectivity with 2 but maintains connectivity
  with 3 in order to differentiate itself with
  respect to 2.

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Comparing ?0, ?m and ?b
A1,2
A1,2,3 y(0,0,0)
?0
A1,2
A1,2,3 y(1,1,1)
?m
A1,2
?b when 4I233I13
A1,2,3 y(0,1,1)
?b when 3I13gt2I124I23
M(0,1,0)
M(0,0,0)
M(1,1,1)
M(1,1,0)
M
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Social welfare

• SW coincides with the librarys payoff.
• Under A1, SW is first determined by the number of
  active publishers and then by the level of
  interconnection
• As long as A is the same, the multilateral
  regime is at least weakly the best.
• Otherwise, no interconnection regime or the
  bilateral regime can be optimal

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Symmetric publishers with sequential
interconnection

• Under the multilateral interconnection regime,
  all publishers are active and fully
  interconnected
• Under the bilateral regime
• If MltI, two possible outcomes in which either 2
  or 3 is excluded.
• Otherwise, the unique equilibrium as in the
  multilateral regime

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Robustness the multilateral interconnection

• The outcome of the sequential interconnection
  game is equivalent to that of the simultaneous
  interconnection game
• The results of both games extend to the case of
  any number of heterogeneous libraries

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

• CRT consider the bilateral interconnection game
  through peering among 3 IBPs with the market
  shares in terms of the installed base
• Differences between their model and ours
• Cournot (Market expansion) versus Salop
• Single-homing versus multi-homing
• They show under certain parameter conditions, 1
  interconnects only with 2 to prevent 3 from
  gaining any new customer.

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

• Consider
• There exists ?1gt1/2 such that under the
  multilateral interconnection regime, all IBPs
  fully interconnect for any ?1 ? ?1.

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Conclusion

• Interconnection (or interoperability) among
  different electronic platforms is a very
  important issue in general and in particular, in
  the case of academic journals.
• The multilateral interconnection provides much
  stronger incentive to interconnect than the
  bilateral one
• Our insight can be applied to Interconnection
  among Internet Backbone companies.
• A surprising result is that exclusion may occur
  more often under the multilateral regime than
  under the bilateral regime and hence SW may be
  higher under the latter
• A general message Allowing firms to have finer
  instruments to discriminate makes interconnection
  more difficult than banning the discrimination
  (Jeon, Laffont, Tirole, RJE, 2005)