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Empirical Analysis of Network Effects in Nonlinear Pricing Data

Liang Chen and Yao Luo

Working Papers from University of Toronto, Department of Economics

Abstract: Network effects, i.e., an agent's utility may depend on other agents' choices, appear in many contracting situations. Empirically assessing them faces two challenges: an endogeneity problem in contract choice and a reflection problem in network effects. This paper proposes a nonparametric approach to tackle both challenges by exploiting restriction conditions from both demand and supply sides. We illustrate our methodology in the yellow pages advertising industry. Using advertising purchases and nonlinear price schedules from seven directories in Toronto, we find positive network effects, which account for a substantial portion of the publisher's profit and businesses' surpluses. We finally conduct counterfactuals to assess the overall and distributional welfare effects of the nonlinear pricing scheme relative to an alternative linear pricing scheme with and without network effects.

Keywords: Identification; Asymmetric Information; Network Effects; Nonlinear Pricing (search for similar items in EconPapers)
JEL-codes: L11 L12 L13 (search for similar items in EconPapers)
Pages: Unknown pages
Date: 2023-09-25
New Economics Papers: this item is included in nep-com, nep-ecm, nep-ger, nep-ind and nep-reg
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