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Profit Maximization And Social Optimum With Network Externality

Author

Listed:
  • Uriel Spiegel

    (Interdisciplinary Department of Social Sciences, Bar-Ilan University, and Visiting Professor, University of Pennsylvania)

  • Uri Ben-Zion

    (BGU)

  • Tchai Tavor

    (BGU)

Abstract

The paper analyzes the options open to monopoly firms that sell software or internet service. We consider two groups of customers which are different in their reservation prices. The monopoly in general use price discrimination between customers by producing two versions of the product at different prices where the existing low price must be zero for the lower quality product (i.e., free version). The monopoly can sell advertising space to increase its revenue but risk losing customers that are annoyed by advertising. We show that the monopoly has an incentive to increase its output due to the network externality. We also find cases where the maximum profit is consistent with maximum social welfare. This means that no government regulation is needed. The model is consistent with the empirical marketing software product and internet service in the real-world (e.g., Adobe Acrobat).

Suggested Citation

  • Uriel Spiegel & Uri Ben-Zion & Tchai Tavor, 2005. "Profit Maximization And Social Optimum With Network Externality," Working Papers 0509, Ben-Gurion University of the Negev, Department of Economics.
    • Handle: RePEc:bgu:wpaper:0509
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    File URL: https://in.bgu.ac.il/en/humsos/Econ/Workingpapers/0509.pdf
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    References listed on IDEAS

    as
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