Network effects, trade, and productivity

Tianle Song and Susheng Wang

Managerial and Decision Economics, 2019, vol. 40, issue 7, 815-822

Abstract: We consider network effects in the monopolistically competitive model of trade developed by Melitz and Ottaviano (2008). We show that a larger network effect intensifies competition by allowing more‐productive firms to raise prices and earn higher profits, but forcing less‐productive firms to reduce prices and earn lower profits. As a result, low‐productivity firms are driven out of the market. We also show that when network effects are asymmetric, it may be difficult for firms from a country with a small network effect to compete with firms from a country with a large network effect.

Date: 2019
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https://doi.org/10.1002/mde.3045

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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:40:y:2019:i:7:p:815-822

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