Profit Maximization and Social Optimum with Network Externality

18 Pages Posted: 8 May 2006

See all articles by Uriel Spiegel

Uriel Spiegel

Bar-Ilan University - Department of Management

Uri Ben-Zion

Technion-Israel Institute of Technology

Tchai Tavor

Ben-Gurion University of the Negev - Department of Economics

Abstract

The paper analyzes the options open to monopoly firms that sell Internet services. We consider two groups of customers that are different in their reservation prices. The monopoly uses price discrimination between customers by producing two versions of the product at positive price for high-quality product and a free version at zero price for lower-quality product. The monopoly can sell advertising space to increase its revenue but risks losing customers who are annoyed by advertising. Network externalities increase the incentive to increase output; thus we find cases where the profit maximization is consistent with maximum social welfare.

Suggested Citation

Spiegel, Uriel and Ben-Zion, Uri and Tavor, Tchai, Profit Maximization and Social Optimum with Network Externality. Manchester School, Vol. 74, No. 2, pp. 138-155, March 2006. Available at SSRN: https://ssrn.com/abstract=886410 or http://dx.doi.org/10.1111/j.1467-9957.2006.00485.x

Uriel Spiegel (Contact Author)

Bar-Ilan University - Department of Management ( email )

Ramat-Gan, 52900
Israel
011-972-3-5318282 (Phone)
+972.3.535.3329 (Fax)

Uri Ben-Zion

Technion-Israel Institute of Technology ( email )

Technion City
Haifa 32000, Haifa 32000
Israel

Tchai Tavor

Ben-Gurion University of the Negev - Department of Economics

Beer-Sheva 84105
Israel

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