IDEAS home Printed from https://ideas.repec.org/a/eee/iepoli/v16y2004i4p535-552.html
   My bibliography  Save this article

The welfare effect of quality degradation in the presence of network externalities

Author

Listed:
  • Hahn, Jong-Hee

Abstract

This paper examines how the presence of network externalities affects a monopolist’s incentive for quality degradation and its welfare consequence. The software and the Internet service industries provide our primary motivation. The network externality may lead to a Pareto-improving quality degradation that would not be realised in the absence of network externalities. However, it may also overturn a potentially Paretoimproving quality degradation to a welfare-reducing one, or result in the realisation of a welfare-reducing quality degradation that would be avoided without network externalities. We also endogenise the firm’s forward and backward compatibility decisions between the original good and the degraded good. Key Words : Damaged Goods, Quality Degradation, Network Externalities, Compatibility,Price Discrimination, Software
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Hahn, Jong-Hee, 2004. "The welfare effect of quality degradation in the presence of network externalities," Information Economics and Policy, Elsevier, vol. 16(4), pages 535-552, December.
    • Handle: RePEc:eee:iepoli:v:16:y:2004:i:4:p:535-552
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167-6245(03)00075-1
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
    2. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
    3. Choi, Jay Pil, 1994. "Network Externality, Compatibility Choice, and Planned Obsolescence," Journal of Industrial Economics, Wiley Blackwell, vol. 42(2), pages 167-182, June.
    4. Neil Gandal, 1994. "Hedonic Price Indexes for Spreadsheets and an Empirical Test for Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 160-170, Spring.
    5. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    6. Cabral, Luis M. B. & Salant, David J. & Woroch, Glenn A., 1999. "Monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 199-214, February.
    7. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    8. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, June.
    9. Bensaid, Bernard & Lesne, Jean-Philippe, 1996. "Dynamic monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 837-855, October.
    10. Michael Waldman, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(1), pages 273-283.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jong‐Hee Hahn, 2006. "Damaged durable goods," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 121-133, March.
    2. Corrado Benassi & Marcella Scrimitore, 2017. "Income Distribution in Network Markets," Journal of Industry, Competition and Trade, Springer, vol. 17(3), pages 251-271, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gergely Csorba & Jong‐Hee Hahn, 2006. "Functional Degradation And Asymmetric Network Effects," Journal of Industrial Economics, Wiley Blackwell, vol. 54(2), pages 253-268, June.
    2. Jullien, Bruno, 2001. "Competing with Network Externalities and Price Discrimination," CEPR Discussion Papers 2883, C.E.P.R. Discussion Papers.
    3. Oz Shy, 2011. "A Short Survey of Network Economics," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 38(2), pages 119-149, March.
    4. Cerquera Dussán, Daniel, 2007. "Durable Goods, Innovation and Network Externalities," ZEW Discussion Papers 07-086, ZEW - Leibniz Centre for European Economic Research.
    5. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, September.
    6. Ewald Scherm & Christian Maaß, 2006. "Zum Stellenwert der Netzwerkökonomik in der Strategie-/Marketingforschung —Eine Analyse empirischer Untersuchungen," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 17(1), pages 27-46, March.
    7. Banerji, A. & Dutta, Bhaskar, 2009. "Local network externalities and market segmentation," International Journal of Industrial Organization, Elsevier, vol. 27(5), pages 605-614, September.
    8. Navarro, Noemí, 2012. "Price and quality decisions under network effects," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 263-270.
    9. Dementiev, V. & Evsukov, S. & Ustyuzhanina, E., 2020. "The importance of a strategic approach to pricing in markets for network goods," Journal of the New Economic Association, New Economic Association, vol. 46(2), pages 57-71.
    10. Corrado Benassi & Marcella Scrimitore, 2017. "Income Distribution in Network Markets," Journal of Industry, Competition and Trade, Springer, vol. 17(3), pages 251-271, September.
    11. Luís Cabral, 2011. "Dynamic Price Competition with Network Effects," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(1), pages 83-111.
    12. Drew Fudenberg & Jean Tirole, 1998. "Upgrades, Tradeins, and Buybacks," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 235-258, Summer.
    13. Vitor Trindade & Johannes Moenius, 2007. "Networks, Standards and Intellectual Property Rights," Working Papers 0705, Department of Economics, University of Missouri.
    14. Netsanet Haile & Jorn Altmann, 2013. "Estimating the Value Obtained from Using a Software Service Platform," TEMEP Discussion Papers 2013105, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Aug 2013.
    15. Jullien, Bruno & Pavan, Alessandro & Rysman, Marc, 2021. "Two-sided Markets, Pricing, and Network Effects," TSE Working Papers 21-1238, Toulouse School of Economics (TSE).
    16. Deishin Lee & Haim Mendelson, 2007. "Adoption of Information Technology Under Network Effects," Information Systems Research, INFORMS, vol. 18(4), pages 395-413, December.
    17. Ming Hu & Zizhuo Wang & Yinbo Feng, 2020. "Information Disclosure and Pricing Policies for Sales of Network Goods," Operations Research, INFORMS, vol. 68(4), pages 1162-1177, July.
    18. Athanasopoulos, Thanos, 2015. "Efficient Upgrading in Durable Network Goods: Is Commitment Always Good?," Economic Research Papers 270543, University of Warwick - Department of Economics.
    19. Arun Sundararajan, 2003. "Network Effects, Nonlinear Pricing and Entry Deterrence," Industrial Organization 0307002, University Library of Munich, Germany.
    20. Daniel Birke, 2009. "The Economics Of Networks: A Survey Of The Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 762-793, September.

    More about this item

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:iepoli:v:16:y:2004:i:4:p:535-552. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505549 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.