Monopolization via Voluntary Network Effects
Bar-Ilan University - Faculty of Law
August 2, 2010
Antitrust Law Journal, Vol. 76, No. 3, 2010
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.
Number of Pages in PDF File: 24
Keywords: network effects, antitrust, cellular, monopolization
Date posted: August 2, 2010