41 Pages Posted: 12 Apr 2010
Date Written: April 2010
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.
Keywords: competition, differentiated products, efficiency, Local network externalities
JEL Classification: D43, D62
Suggested Citation: Suggested Citation
Fjeldstad, Øystein and Moen, Espen R. and Riis, Christian, Competition with Local Network Externalities (April 2010). CEPR Discussion Paper No. DP7778. Available at SSRN: https://ssrn.com/abstract=1586258
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