Competition with Local Network Externalities

41 Pages Posted: 12 Apr 2010  

Øystein Fjeldstad

Norwegian School of Management

Espen R. Moen

Norwegian School of Management; Centre for Economic Policy Research (CEPR)

Christian Riis

Norwegian Business School

Multiple version iconThere are 2 versions of this paper

Date Written: April 2010

Abstract

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

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

Øystein Fjeldstad (Contact Author)

Norwegian School of Management ( email )

Nydalesvn 37
Oslo, N-0442
Norway

Espen R. Moen

Norwegian School of Management ( email )

N-0442 Oslo
Norway
+47 67 557 395 (Phone)
+47 67 557 675 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Christian Riis

Norwegian Business School ( email )

Nydalsveien 37
N-0442 Oslo
Norway
46410789 (Phone)

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