On Price Elasticities in the Presence of Network Effects
16 Pages Posted: 2 Mar 2015 Last revised: 5 Apr 2015
Date Written: April 5, 2015
Price elasticities characterize the effect of price changes on demands in a multi-product context. We demonstrate and explain two perverse properties concerning price elasticities in the presence of network effects when three or more substitutable products are involved: Cross-price elasticities are not necessarily positive, and own-price elasticities are not necessarily negative. These findings imply that the consequences of firms' price moves in a competitive market when network effects are in play deserve further scrutiny.
Keywords: cross-price elasticity, own-price elasticity, network effects, substitutes
JEL Classification: D43, L11, L13, L14
Suggested Citation: Suggested Citation