Price discrimination with network effects: different welfare results from identical demand functions

Ryo Hashizume (), Takeshi Ikeda () and Tatsuhiko Nariu ()
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Ryo Hashizume: Faculty of Economics, Daito Bunka University
Takeshi Ikeda: Faculty of Economics, Daito Bunka University
Tatsuhiko Nariu: Graduate School of Business, Doshisha University

Economics Bulletin, 2021, vol. 41, issue 3, 1807-1812

Abstract: We show that the welfare effects of third-degree price discrimination depend on what kind of network effects are present—between-markets or within-market. Different combinations of parameters that determine the strength of network effects between-markets and within-market induce the same demand functions; however, measured consumer surplus and social welfare based on the demand functions vary across these parameters. This result indicates that welfare analysis of markets with network effects must be based on consumer utility functions that parameterize the network effects, and not on demand functions that, although sufficient to describe monopoly price-setting, mask the impact of network effects on consumer welfare.

Keywords: Monopoly; Network effects; Third-degree price discrimination (search for similar items in EconPapers)
JEL-codes: D4 L1 (search for similar items in EconPapers)
Date: 2021-09-17
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Citations: View citations in EconPapers (1)

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