Pricing of Complements and Network Effects

32 Pages Posted: 28 Jul 2012 Last revised: 6 Oct 2013

See all articles by Nicholas Economides

Nicholas Economides

New York University - Leonard N. Stern School of Business - Department of Economics

V. Brian Viard

Cheung Kong Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 15, 2006

Abstract

We discuss the case of a monopolist of a base good in the presence of a complementary good provided either by it or by another firm. We assess and calibrate the extent of the influence on the profits from the base good that is created by the existence of the complementary good. We establish an equivalence between a model of a base and a complementary good and a reduced-form model of the base good in which network effects are assumed in the consumers’ utility functions as a surrogate for the presence of direct or indirect network effects, such as complementary goods produced by other firms. We also assess and calibrate the influence on profits of the intensity of network effects and quality improvements in both goods. We evaluate the incentive that a monopolist of the base good has to improve its quality rather than that of the complementary good under different market structures. Finally, based on our results, we discuss a possible explanation of the fact that Microsoft Office has a significantly higher price than Microsoft Windows although both products have comparable market shares.

Keywords: calibration, monopoly, network effects, complementary goods, software, Microsoft

JEL Classification: L12, L13, C63, D42, D43

Suggested Citation

Economides, Nicholas and Viard, V. Brian, Pricing of Complements and Network Effects (August 15, 2006). TPRC 2006. Available at SSRN: https://ssrn.com/abstract=2118273

Nicholas Economides (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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V. Brian Viard

Cheung Kong Graduate School of Business ( email )

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Beijing, 100738
China
86-10-8518-8858 (Phone)
86-10-8518-6800 (Fax)

HOME PAGE: http://english.ckgsb.edu.cn/faculty_content/brian-viard

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