Critical Mass and Tariff Structure in Electronic Communications Markets

Shmuel S. Oren and Stephen A. Smith

Bell Journal of Economics, 1981, vol. 12, issue 2, 467-487

Abstract: Most communication services have a demand "externality" in that the benefit to a subscriber depends upon how many of his communication partners also subscribe. This article develops an economic model that determines both the required critical mass size for startup and the ultimate expansion level of such a system. The effects of different pricing structures for the service are evaluated under the assumption that users maximize benefits minus cost and a monopoly supplier maximizes profit.

Date: 1981
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