The Welfare Effect of Quality Degradation in the Presence of Network Externalities

Jong-Hee Hahn

No 2001/08, Keele Department of Economics Discussion Papers (1995-2001) from Department of Economics, Keele University

Abstract: This paper examines how the presence of network externalities affects a monopolist’s incentive for quality degradation and its welfare consequence. The software and the Internet service industries provide our primary motivation. The network externality may lead to a Pareto-improving quality degradation that would not be realised in the absence of network externalities. However, it may also overturn a potentially Paretoimproving quality degradation to a welfare-reducing one, or result in the realisation of a welfare-reducing quality degradation that would be avoided without network externalities. We also endogenise the firm’s forward and backward compatibility decisions between the original good and the degraded good. Key Words : Damaged Goods, Quality Degradation, Network Externalities, Compatibility,Price Discrimination, Software

JEL-codes: L12 L15 L86 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2001, Revised 2003-02
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Published in Information Economics and Policy, 2004, vol. 16, issue 4, pages 535-552. [ doi:10.1016/j.infoecopol.2003.07.002 ]

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Journal Article: The welfare effect of quality degradation in the presence of network externalities (2004)
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