Monopolization via Voluntary Network Effects

Abstract

Network effects are commonly seen as an exogenous product characteristic, relevant to some products but not others. This paper explores an existing, but often-ignored issue, that network effects are sometimes voluntarily created by the firm, and need not exist otherwise. When a firm strategically creates network effects, the result could be a shift in market structure, leading to a tipping monopoly-prone market, rather than a more competitive one.

The paper explains two main methods of VNE creation, and assesses their characterization as willful acquisition or maintenance of monopoly power - a Section 2 Sherman Act offense. Guiding examples include differential pricing for in-net vs. off-net calls in the cellular market, and technological innovation of add-on components in video games. Other applications and future extensions are discussed. Discussion of policy implications concludes, including the difficulties and dangers of excessive regulation.

Keywords: network effects, antitrust, cellular, monopolization