Pricing of Complementary Goods and Network Effects

Nicholas Economides () and V. Viard

No 04-21, Working Papers from NET Institute

Abstract: We discuss the case of a monopolist of a base good in the presence of complementary goods provided either by it or by other firms. We assess and calibrate the extent of the influence on the profits from the base good that is created by the existence of complementary goods, i.e., the extent of the network effect. We establish an equivalence between a model of a base and a complementary good and a reduced-form model of the base good in which network effects are assumed in the consumers’ utility functions as a surrogate for the presence of complementary goods produced by others. We also assess and calibrate the influence on profits of the intensity of network effects and quality improvements in both goods. We evaluate the incentive that a monopolist of the base good has to improve its quality rather than that of complementary goods. Finally, based on our results, we discuss an explanation of the fact that Microsoft Office has a significantly higher price than Microsoft Windows although both products have comparable market shares.

Keywords: calibration; monopoly; network effects; complementary goods; software; Microsoft (search for similar items in EconPapers)
JEL-codes: C63 D42 D43 L12 L13 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2004-08, Revised 2004-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Pricing of Complementary Goods and Network Effects (2006)
Working Paper: Pricing of Complementary Goods and Network Effects* (2005)
Working Paper: Pricing of Complementary Goods and Network Effects* (2005)
Working Paper: Pricing of Complementary Goods and Network Effects (2005)
Working Paper: Pricing of Complementary Goods and Network Effects (2004)
Working Paper: Pricing of Complementary Goods and Network Effects (2003)
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