| This dissertation consists of three essays relating to the computer industry. The first essay is theoretical in nature, and examines the equilibrium behavior of a monopoly incumbent that enjoys network externalities. It is shown that, under certain conditions, the incumbent can deter entry by utilizing its prevailing network power even when the potential entrant could, in principle, enter the market at zero cost. However, if consumers are heterogeneous so that different types of consumers value products very differently, the entrant can gain a sizable share of the market.; The second essay is empirical in nature, and is based on an extensive data set consisting of monthly prices and characteristics (hard disk size, memory, processor speed, etc.) of computer hardware. The analysis shows that the quality adjusted price of PCs declined more than 53 percent in 1998, while the nominal price fell only 16 percent. While I find a strong brand premium for Intel processors (compared to AMD and Cyrix processors), no significant brand premiums are present for individual manufacturers of personal computers. In short, this essay indicates that by 1998, downstream markets for personal computers had evolved into highly competitive environments. In contrast, players such as Intel in upstream markets continued to maintain market power as evidenced by a significant premium for their brands.; The third essay presents an oligopoly model of crimping. Crimping is the well-documented practice of firms intentionally lowering the quality of their product. Perhaps the best example of crimping is software, where firms such as Microsoft create stripped down "educational versions" of software by merely disabling (at positive fixed cost) features available on higher-quality versions. The crimping puzzle is this: Why would a firm spend money to turn a superior product into an inferior one? While it is known that a monopolist might crimp in order to price discriminate, it is an open question whether crimping arises as the equilibrium in oligopoly setting. I show that, in fairly general oligopoly environments, crimping will occur in equilibrium if the cost of crimping is sufficiently low or the market for the low-quality product is sufficiently large. |
