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

Irina Suleymanova and Christian Wey

No 794, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

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.

Keywords: Bertrand duopoly; network effects; (In-) compatibility; welfare (search for similar items in EconPapers)
JEL-codes: D43 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-mic and nep-net
Date: Written 2008
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