Interconnecting Differentiated Networks

Alexei Alexandrov

No 08-07, Working Papers from NET Institute

Abstract: I examine interconnection decisions of differentiated firms. I find that previous results that firms never interconnect enough do not hold. In a Hotelling model consumers may suffer from interconnection, and firms may interconnect when it is not socially optimal. The firms interconnect too much when the network effects are steeper - this makes firms compete much less aggressively after interconnection, raising prices for consumers and profits for firms. Price and profit rise results holds under quality and installed base asymmetries, or only some firms in the industry interconnecting. More dimensions of differentiation make interconnection less attractive.

Keywords: network effects; interconnection; oligopoly; product differentiation (search for similar items in EconPapers)
JEL-codes: D43 L15 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2008-10, Revised 2008-10
New Economics Papers: this item is included in nep-com, nep-mic and nep-net
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