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Contracting with asymmetric information in the presence of positive network effects: Screening and divide-and-conquer techniques

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  • Csorba, Gergely

Abstract

This paper shows how pessimistic expectations reduce the effectivity of monopolist screening techniques with positive network effects, and demonstrates how divide-and-conquer strategies can solve the consumers' coordination problem. In the sequential mechanism, different expectations about future network size become relevant in the incentive constraints of different consumer types. Screening consumers is less costly in later periods, so pooling may be beneficial in early stages of contracting. The joint presence of asymmetric information and positive network effects yields a strict downward distortion from the welfare-maximizing quantity scheme, while unique implementation has further downward distorting effects.

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Bibliographic Info

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

Volume (Year): 20 (2008)
Issue (Month): 1 (March)
Pages: 54-66

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Handle: RePEc:eee:iepoli:v:20:y:2008:i:1:p:54-66

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

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  1. Michael D. Whinston & Ilya R. Segal, 2000. "Naked Exclusion: Comment," American Economic Review, American Economic Association, vol. 90(1), pages 296-309, March.
  2. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
  3. Jullien, Bruno, 2000. "Competing in Network Industries: Divide and Conquer," IDEI Working Papers 112, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jul 2001.
  4. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  5. Moller, Marc, 2007. "The timing of contracting with externalities," Journal of Economic Theory, Elsevier, vol. 133(1), pages 484-503, March.
  6. Genicot, Garance & Ray, Debraj, 2006. "Contracts and externalities: How things fall apart," Journal of Economic Theory, Elsevier, vol. 131(1), pages 71-100, November.
  7. Cooper, Russell, et al, 1990. "Selection Criteria in Coordination Games: Some Experimental Results," American Economic Review, American Economic Association, vol. 80(1), pages 218-33, March.
  8. Segal, Ilya, 2003. "Coordination and discrimination in contracting with externalities: divide and conquer?," Journal of Economic Theory, Elsevier, vol. 113(2), pages 147-181, December.
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