Competition with Local Network Externalities
Norwegian School of Management
Espen R. Moen
Norwegian School of Management; Centre for Economic Policy Research (CEPR)
Norwegian Business School
CEPR Discussion Paper No. DP7778
Local network externalities are present when the utility of buying from a firm not only depends on the number of other customers (global network externalities), but also on their identity and/or characteristics. We explore the consequences of local network externalities within a framework where two firms compete offering differentiated products. We first show that local network externalities, in contrast to global network externalities, don't necessarily sharpen competition. Then we show that the equilibrium allocation is inefficient, in the sense that the allocation of consumers on firms does not maximize social surplus. Finally we show that local network externalities create a difference between the marginal and the average consumer, which gives rise to inefficiently high usage prices and too high level of compatibility between the networks.
Number of Pages in PDF File: 41
Keywords: competition, differentiated products, efficiency, Local network externalities
JEL Classification: D43, D62
Date posted: April 12, 2010
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