Compatibility and Market Structure for Network Goods

Nicholas Economides () and Fredrick Flyer

Working Papers from New York University, Leonard N. Stern School of Business, Department of Economics

Abstract: This paper analyzes the economics of industries where network externalities are significant. In such industries, firms have strong incentives to adhere to common technical compatibility standards, so that they reap the network externalities of the whole group. However, a firm also benefits from producing an incompatible product thereby increasing its horizontal product differentiation. We show how competition balances these opposing incentives. We find that market equilibria often exhibit extreme disparities in sales, output prices, and profits across firms, despite no inherent differences in the firms' production technologies. This may explain the frequent domination of network industries by one or two firms. We also find that the presence of network externalities dramatically affects conventional welfare analysis, as total surplus in markets where these externalities are strong is highest under monopoly and declines with entry of additional firms.

Keywords: networks; network externalities; coalition structures; technical standards; compatibility (search for similar items in EconPapers)
JEL-codes: D4 L1 (search for similar items in EconPapers)
Date: 1997-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
http://raven.stern.nyu.edu/networks/98-02.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ste:nystbu:98-02

Access Statistics for this paper

More papers in Working Papers from New York University, Leonard N. Stern School of Business, Department of Economics New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126. Contact information at EDIRC.
Bibliographic data for series maintained by Amanda Murphy ().