New Network Goods

João Leão and Vasco Santos
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João Leão: MIT - Department of Economics, ISCTE - Department of Economics and UNIDE-ERC
Vasco Santos: FE-UNL and INOVA

No ercwp2308, Working Papers Series 1 from ISCTE-IUL, Business Research Unit (BRU-IUL)

Abstract: New horizontally-differentiated goods involving product-specific network effects are quite prevalent. Consumers’ preferences for each of these new goods often are initially unknown. Later, as sales data begin to accumulate, agents learn market-wide preferences which thus become common knowledge. We call network goods’ markets showing these two features “new network markets.” For such markets, we pinpoint the factors determining whether the market-wide preferred firm reinforces its lead as time elapses, both when market-wide preferences are time invariant and when they may change. The latter case allows for the study of markets subject to consumer fads (unanticipated and fleeting consumers’ preference for one product). We show that in new network markets subject to such fads, the firm that benefits from a fad in a mature phase of the industry may be better off than one that benefits from an equal-strength fad at an earlier stage despite the presence of network effects. Moreover, we show that new network markets are more prone to increased sales dominance of the leading firm than are regular network markets. Finally, we characterize the social-welfare maximizing allocation of consumers to networks and use it to evaluate from a social-welfare viewpoint the market outcomes of both types of new network goods as well as regular network goods.

Keywords: Network Effects; Learning; Horizontal Differentiation; Vertical Differentiation (search for similar items in EconPapers)
JEL-codes: L14 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2008-05-15
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