Pricing of Complementary Goods and Network Effects*

Nicholas Economides () and V. Viard

No 05-04, Working Papers from NET Institute

Abstract: We discuss the case of a monopolist of a base good in the presence of a complementary good provided either by it or by another firm. We assess and calibrate the extent of the influence on the profits from the base good that is created by the existence of the complementary good, i.e., the extent of the network effect. We establish an equivalence between a model of a base and a complementary good and a reduced-form model of the base good in which network effects are assumed in the consumers’ utility functions as a surrogate for the presence of direct or indirect network effects, such as complementary goods produced by other firms. We also assess and calibrate the influence on profits of the intensity of network effects and quality improvements in both goods. We evaluate the incentive that a monopolist of the base good has to improve its quality rather than that of the complementary good under different market structures. Finally, based on our results, we discuss a possible explanation of the fact that Microsoft Office has a significantly higher price than Microsoft Windows although both products have comparable market shares.

JEL-codes: C63 D42 D43 L12 L13 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2005-11, Revised 2005-11
New Economics Papers: this item is included in nep-ind, nep-mkt and nep-soc
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Related works:
Working Paper: Pricing of Complementary Goods and Network Effects (2006)
Working Paper: Pricing of Complementary Goods and Network Effects* (2005)
Working Paper: Pricing of Complementary Goods and Network Effects (2005)
Working Paper: Pricing of Complementary Goods and Network Effects (2004)
Working Paper: Pricing of Complementary Goods and Network Effects (2004)
Working Paper: Pricing of Complementary Goods and Network Effects (2003)
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