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Indirect Network Effects and the Impact of Trade Liberalization: A Note

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  • Kazumichi, Iwasa
  • Kikuchi, Toru

Abstract

Indirect network effects exist when the utility of consumers is increasing in the variety of complementary software products available for use with an electronic hardware device. In this note, we examine how trade liberalization affects production structure in the presence of indirect network effects. For these purposes we construct a simple two-country model of trade with two incompatible hardware technologies. It is shown that, given that both types of hardware exist before trade liberalization, liberalization may reduce the variety of hardware technology via intensified network effects. It is also shown that, contrary to the findings of previous studies, some consumers may become worse off as the result of trade. In other words, trade liberalization, which forms the basis for a greater variety of software products, may work as a catalyst for Pareto inferior outcomes.

Suggested Citation

  • Kazumichi, Iwasa & Kikuchi, Toru, 2008. "Indirect Network Effects and the Impact of Trade Liberalization: A Note," MPRA Paper 8662, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:8662
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    References listed on IDEAS

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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