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The welfare effect of quality degradation in the presence of network externalities

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  • Hahn, Jong-Hee

Abstract

This paper examines how the presence of network externalities affects a monopolist’s incentive for quality degradation and its welfare consequence. The software and the Internet service industries provide our primary motivation. The network externality may lead to a Pareto-improving quality degradation that would not be realised in the absence of network externalities. However, it may also overturn a potentially Paretoimproving quality degradation to a welfare-reducing one, or result in the realisation of a welfare-reducing quality degradation that would be avoided without network externalities. We also endogenise the firm’s forward and backward compatibility decisions between the original good and the degraded good. Key Words : Damaged Goods, Quality Degradation, Network Externalities, Compatibility,Price Discrimination, Software

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Bibliographic Info

Article provided by Elsevier in its journal Information Economics and Policy.

Volume (Year): 16 (2004)
Issue (Month): 4 (December)
Pages: 535-552

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Handle: RePEc:eee:iepoli:v:16:y:2004:i:4:p:535-552

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Web page: http://www.elsevier.com/locate/inca/505549

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References

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  1. Economides, Nicholas, 1996. "The economics of networks," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 673-699, October.
  2. Waldman, Michael, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 273-83, February.
  3. repec:att:wimass:9508 is not listed on IDEAS
  4. Cabral, Luis M. B. & Salant, David J. & Woroch, Glenn A., 1999. "Monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 199-214, February.
  5. Choi, J.P., 1991. "Network Externality, Compatibility Choice, and Planned Obsolescence," Discussion Papers 1991_67, Columbia University, Department of Economics.
  6. Bensaid, Bernard & Lesne, Jean-Philippe, 1996. "Dynamic monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 837-855, October.
  7. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, 06.
  8. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  9. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
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Cited by:
  1. Jong‐Hee Hahn, 2006. "Damaged durable goods," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 121-133, 03.
  2. Corrado Benassi & Marcella Scrimitore, 2013. "Income Distribution in Network Markets," Working Paper Series 13_13, The Rimini Centre for Economic Analysis.

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