What's on the Menu? Consumption Externalities & Product Quality

Sarit Markovich and Luis Rayo

No 19792, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We consider a monopolistic platform who offers a menu of products differing in quality, such as their level of data privacy. Because of network externalities, the adoption of these products is subject to equilibrium multiplicity, which we handle using a novel notion of focality able to accommodate menus. The optimal menu depends critically on the platform’s focality, with a focal platform trading too little, and a nonfocal one too much, relative to the social optimum. This is because the nonfocal platform relies on consumers with the highest willingness to trade—such as those with the least privacy concerns—to build its network.

Date: 2024-12
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