Monopolization via Voluntary Network Effects

Abstract:     
Firms strategically investing in creating (or strengthening) network effects, are engaged in actively shifting market structure. From situations where standard competition may be possible, they shift the market towards monopoly, betting on their ability to win the 'competition for the market'.

In this paper I set out to explain the nature of such voluntary (as opposed to exogenously determined) network effects, and their antitrust implications.

A theoretical framework is presented, distinguishing between VNE based on technology and those stemming from pricing tactics alone. The market for video game consoles exemplifies technological VNE, while cellular calling plans allow for examining price-mediated VNE.

After examining in detail each of these markets and the antitrust implications of voluntary network effects of various types, a variety of additional real-world applications are presented where VNE are (or could easily be) used. Discussion of policy implications and hazards of excessively zealous regulation concludes.

Number of Pages in PDF File: 31

Keywords: network effects, antitrust, cellular phones, monopolization

JEL Classification: D21, D42, D84, K21, L12, L41

working papers series