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Network Externality and the Coordination Problem: A Generalization of Rohlfs's Model

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  • L. Lambertini
  • R. Orsini

Abstract

We show that Rholfs's (1974) model is a special case of a spatial monopoly model la Hotelling (1929) with quadratic transportation costs, where location is exogenous and the good yealds no intrinsic utility. By relaxing these assumptions, we prove that the coordination problem typically thought to affect markets for network goods may not arise in general. Endogenizing location makes it easier for the monopolist to extract consumer surplus but also to cover the entire market.

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  • L. Lambertini & R. Orsini, 2003. "Network Externality and the Coordination Problem: A Generalization of Rohlfs's Model," Working Papers 471, Dipartimento Scienze Economiche, Universita' di Bologna.
    • Handle: RePEc:bol:bodewp:471
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    References listed on IDEAS

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    1. Giacomo Bonanno, 1987. "Location Choice, Product Proliferation and Entry Deterrence," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(1), pages 37-45.
    2. Luca Lambertini & Raimondello Orsini, 2001. "Network Externalities and the Overprovision of Quality by a Monopolist," Southern Economic Journal, John Wiley & Sons, vol. 67(4), pages 969-982, April.
    3. Jeffrey Rohlfs, 1974. "A Theory of Interdependent Demand for a Communications Service," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 16-37, Spring.
    4. Economides, Nicholas & Encaoua, David, 1996. "Special issue on network economics: Business conduct and market structure," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 669-671, October.
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