On the (Mis-) Alignment of Consumer and Social Welfare in Markets with Network Effects

17 Pages Posted: 21 May 2008

See all articles by Irina Suleymanova

Irina Suleymanova

German Institute for Economic Research (DIW Berlin)

Christian Wey

University of Düsseldorf - Düsseldorf Institute for Competition Economics (DICE)

Date Written: May 1, 2008

Abstract

We analyze duopoly Bertrand competition under network effects. We consider both incompatible and compatible products. Our main result is that network effects create a fundamental conflict between the maximization of social welfare and consumer surplus whenever products are incompatible. While consumer surplus is highest in the symmetric equilibrium, social welfare is highest in the asymmetric equilibrium. We also show that both consumer surplus and social welfare are higher in any equilibrium under compatibility when compared with incompatible products. However, .firms never have strict incentives to achieve compatibility. Finally, we show the robustness of our results when products are horizontally differentiated.

Keywords: Bertrand duopoly, network effects, (In-) compatibility, welfare

JEL Classification: D43, L13

Suggested Citation

Suleymanova, Irina and Wey, Christian, On the (Mis-) Alignment of Consumer and Social Welfare in Markets with Network Effects (May 1, 2008). DIW Berlin Discussion Paper No. 794, Available at SSRN: https://ssrn.com/abstract=1135663 or http://dx.doi.org/10.2139/ssrn.1135663

Irina Suleymanova (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Christian Wey

University of Düsseldorf - Düsseldorf Institute for Competition Economics (DICE) ( email )

Universitaetsstr. 1
Duesseldorf, NRW 40225
Germany
+49-211-81-15009 (Phone)
+49-211-81-15499 (Fax)

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