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Interconnecting Differentiated Networks

Alexei Alexandrov
Simon Graduate School of Business, University of Rochester

October 1, 2008

Simon School Working Paper No. FR 08-27
NET Institute Working Paper No. 08-07

Abstract:
I examine interconnection decisions of differentiated firms. I find that interconnection (standardization, compatibility) makes a market less competitive, leading to higher prices. Steep network effects mean a bigger post-interconnection price increase. Consumers having network size expectations sensitive to price differences has the same effect. As a result, customers might suffer from interconnection, and firms might interconnect when it is not socially optimal. The results hold when quality or installed bases are asymmetric, only a few of the firms interconnect, and when it is possible to expand the market through interconnection.

Keywords: network effects, interconnection, oligopoly, standardization, compatibility

JEL Classifications: D43, D62, L15

Working Paper Series

Date posted: October 18, 2008 ; Last revised: April 20, 2009

Suggested Citation

Alexandrov, Alexei, Interconnecting Differentiated Networks (October 1, 2008). Simon School Working Paper No. FR 08-27; NET Institute Working Paper No. 08-07. Available at SSRN: http://ssrn.com/abstract=1285750

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Contact Information

Alexei Alexandrov (Contact Author)

Simon Graduate School of Business, University of Rochester ( email )

C Simon Hall, 3-110P
Box 270100
Rochester, NY 14627-0100
United States