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Network effects, trade, and productivity

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  • Tianle Song
  • Susheng Wang

Abstract

We consider network effects in the monopolistically competitive model of trade developed by Melitz and Ottaviano (2008). We show that a larger network effect intensifies competition by allowing more‐productive firms to raise prices and earn higher profits, but forcing less‐productive firms to reduce prices and earn lower profits. As a result, low‐productivity firms are driven out of the market. We also show that when network effects are asymmetric, it may be difficult for firms from a country with a small network effect to compete with firms from a country with a large network effect.

Suggested Citation

  • Tianle Song & Susheng Wang, 2019. "Network effects, trade, and productivity," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 40(7), pages 815-822, October.
    • Handle: RePEc:wly:mgtdec:v:40:y:2019:i:7:p:815-822
    DOI: 10.1002/mde.3045
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