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On the (Mis-) Alignment of Consumer and Social Welfare in Markets with Network Effects

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  • Irina Suleymanova
  • Christian Wey

Abstract

We analyze duopoly Bertrand competition under network effects. We consider both incompatible and compatible products. Our main result is that network effects create a fundamental conflict between the maximization of social welfare and consumer surplus whenever products are incompatible. While consumer surplus is highest in the symmetric equilibrium, social welfare is highest in the asymmetric equilibrium. We also show that both consumer surplus and social welfare are higher in any equilibrium under compatibility when compared with incompatible products. However, .firms never have strict incentives to achieve compatibility. Finally, we show the robustness of our results when products are horizontally differentiated.

Suggested Citation

  • Irina Suleymanova & Christian Wey, 2008. "On the (Mis-) Alignment of Consumer and Social Welfare in Markets with Network Effects," Discussion Papers of DIW Berlin 794, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp794
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    Cited by:

    1. Shekhar, Shiva, 2017. "Homing choice and platform pricing strategy," DICE Discussion Papers 247, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    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.
    3. Domenico Buccella & Luciano Fanti & Luca Gori, 2023. "Strategic product compatibility in network industries," Journal of Economics, Springer, vol. 140(2), pages 141-168, October.
    4. Tsuyoshi Toshimitsu, 2023. "A start-up problem in a pure network good market and the role of a stand-alone effect with a monopoly: A revisit of Rohlfs (1974, 2001)," Economics Bulletin, AccessEcon, vol. 43(3), pages 1434-1443.
    5. Gu, Yiquan & Wenzel, Tobias, 2012. "Transparency, entry, and productivity," Economics Letters, Elsevier, vol. 115(1), pages 7-10.
    6. Suleymanova Irina & Wey Christian, 2011. "Bertrand Competition in Markets with Network Effects and Switching Costs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-58, September.
    7. Wang, Wei & Lyu, Gaoyan, 2020. "Sequential product positioning on a platform in the presence of network effects," International Journal of Production Economics, Elsevier, vol. 229(C).
    8. Ryo Hashizume & Tatsuhiko Nariu, 2020. "Price and quantity competition with network externalities: Endogenous choice of strategic variables," Manchester School, University of Manchester, vol. 88(6), pages 847-865, December.
    9. Marcella Scrimitore, 2019. "Endogenizing managerial delegation: A new result under Nash bargaining and network effects," EERI Research Paper Series EERI RP 2019/15, Economics and Econometrics Research Institute (EERI), Brussels.
    10. Tsuyoshi Toshimitsu, 2019. "Comment on “Price and quantity competition in network goods duopoly: A reversal resultâ€," Economics Bulletin, AccessEcon, vol. 39(3), pages 1855-1859.
    11. Haucap, Justus & Herr, Annika & Frank, Björn, 2011. "In vino veritas: Theory and evidence on social drinking," DICE Discussion Papers 37, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    12. Clémence Christin, 2013. "Entry Deterrence Through Cooperative R&D Over-Investment," Recherches économiques de Louvain, De Boeck Université, vol. 79(2), pages 5-26.
    13. Stühmeier Torben & Wenzel Tobias, 2012. "Regulating Advertising in the Presence of Public Service Broadcasting," Review of Network Economics, De Gruyter, vol. 11(2), pages 1-23, June.
    14. Tsuyoshi Toshimitsu, 2017. "On consumer expectations in a network goods market: The monopoly case," Economics Bulletin, AccessEcon, vol. 37(1), pages 488-493.
    15. Tsuyoshi Toshimitsu, 2016. "Stubbornness is unprofitable: On the role of consumer expectations in a monopoly network goods market," Discussion Paper Series 152, School of Economics, Kwansei Gakuin University, revised Dec 2016.
    16. Ramnath K. Chellappa & Rajiv Mukherjee, 2021. "Platform Preannouncement Strategies: The Strategic Role of Information in Two-Sided Markets Competition," Management Science, INFORMS, vol. 67(3), pages 1527-1545, March.
    17. Doganoglu Toker & Grzybowski Lukasz, 2013. "Dynamic Duopoly Competition with Switching Costs and Network Externalities," Review of Network Economics, De Gruyter, vol. 12(1), pages 1-25, March.
    18. Tsuyoshi Toshimitsu, 2017. "Strategic Trade Policy and Network Compatibility," Journal of Industry, Competition and Trade, Springer, vol. 17(2), pages 237-249, June.
    19. Kevin J. Boudreau, 2021. "Promoting Platform Takeoff and Self-Fulfilling Expectations: Field Experimental Evidence," Management Science, INFORMS, vol. 67(9), pages 5953-5967, September.

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    More about this item

    Keywords

    Bertrand duopoly; network effects; (In-) compatibility; welfare;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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