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The economics of networks

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  • Economides, Nicholas

Abstract

I analyze the salient features of networks and point out the similarities between the economic structure of networks and the structure of vertically related industries. The analysis focuses on positive consumption and production externalities, commonly called network externalities. I discuss their sources and their effects on pricing and market structure. I distinguish between results that do not depend on the underlying industry microstructure (the "macro" approach) and those that do (the "micro" approach). I analyze the issues of compatibility, coordination to technical standards, interconnection and interoperability, and their effects on pricing and quality of services and on the value of network links in various ownership structures. I also briefly discuss the issue of interconnection fees for bottleneck facilities.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 14 (1996)
Issue (Month): 6 (October)
Pages: 673-699

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Handle: RePEc:eee:indorg:v:14:y:1996:i:6:p:673-699

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Web page: http://www.elsevier.com/locate/inca/505551

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References

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  1. Nicholas S. Economides & Glenn A. Woroch, 1992. "Benefits and Pitfalls of Network Interconnection," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 92-31, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Berg, Sanford V., 1988. "Duopoly compatibility standards with partial cooperation and standards leadership," Information Economics and Policy, Elsevier, vol. 3(1), pages 35-53.
  3. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
  4. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
  5. Katz, Michael L & Shapiro, Carl, 1986. "Product Compatibility Choice in a Market with Technological Progress," Oxford Economic Papers, Oxford University Press, vol. 38(0), pages 146-65, Suppl. No.
  6. Farrell, Joseph & Saloner, Garth, 1988. "Coordination Through Committees and Markets," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt08w115vq, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  7. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  8. Economides, Nicholas & White, Lawrence J., 1994. "Networks and compatibility: Implications for antitrust," European Economic Review, Elsevier, vol. 38(3-4), pages 651-662, April.
  9. Jeffrey Church & Neil Gandal, 1992. "Integration, Complementary Products, and Variety," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(4), pages 651-675, December.
  10. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(5), pages 881-94, October.
  11. Economides, Nicholas & Siow, Aloysius, 1988. "The Division of Markets is Limited by the Extent of Liquidity (Spatial Competition with Externalities)," American Economic Review, American Economic Association, vol. 78(1), pages 108-21, March.
  12. Nicholas Economides, 1994. "Quality Choice and Vertical Integration," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 94-22, New York University, Leonard N. Stern School of Business, Department of Economics.
  13. Dybvig, Philip H. & Spatt, Chester S., 1983. "Adoption externalities as public goods," Journal of Public Economics, Elsevier, vol. 20(2), pages 231-247, March.
  14. David, Paul A, 1985. "Clio and the Economics of QWERTY," American Economic Review, American Economic Association, vol. 75(2), pages 332-37, May.
  15. Garbade, Kenneth D & Silber, William L, 1976. "Price Dispersion in the Government Securities Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(4), pages 721-40, August.
  16. Farrell, Joseph, 1989. "Converters, Compatibility, and the Control of Interfaces," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt8161p50b, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  17. Shy, O. & Chou, C-F., 1990. "Partially Compatible Brands And Consumer Welfare," Papers, Tel Aviv 34-90, Tel Aviv.
  18. Nicholas Economides & Lawrence J. White, 1997. "The Inefficiency of the ECPR Yet Again: A Reply to Larson," Industrial Organization, EconWPA 9703001, EconWPA.
  19. Nicholas Economides,, . "How to Enhance Market Liquidity," Financial Networks _002, Economics of Networks.
  20. Dudey, Marc, 1990. "Competition by Choice: The Effect of Consumer Search on Firm Location Decisions," American Economic Review, American Economic Association, vol. 80(5), pages 1092-1104, December.
  21. Garbade, Kenneth D & Silber, William L, 1979. "Structural Organization of Secondary Markets: Clearing Frequency, Dealer Activity and Liquidity Risk," Journal of Finance, American Finance Association, vol. 34(3), pages 577-93, June.
  22. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-65, March.
  23. Cabral, Luis M. B., 1990. "On the adoption of innovations with 'network' externalities," Mathematical Social Sciences, Elsevier, vol. 19(3), pages 299-308, June.
  24. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
  25. Encaoua, D. & Moreaux, M. & Perrot, A., 1992. "Demand-Side Network Effect in Airline Markets," Papiers d'Economie Mathématique et Applications, Université Panthéon-Sorbonne (Paris 1) 92.28, Université Panthéon-Sorbonne (Paris 1).
  26. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(4), pages 822-41, August.
  27. Liebowitz, S J & Margolis, Stephen E, 1990. "The Fable of the Keys," Journal of Law and Economics, University of Chicago Press, vol. 33(1), pages 1-25, April.
  28. Jeffrey Rohlfs, 1974. "A Theory of Interdependent Demand for a Communications Service," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 16-37, Spring.
  29. Nicholas Economides & Lawrence J. White, 1995. "Access and Interconnection Pricing: How Efficient is the Efficient Component Pricing Rule?," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 95-04, New York University, Leonard N. Stern School of Business, Department of Economics.
  30. Matutes, Carmen & Regibeau, Pierre, 1989. "Standardization across Markets and Entry," Journal of Industrial Economics, Wiley Blackwell, vol. 37(4), pages 359-71, June.
  31. Matutes, Carmen & Regibeau, Pierre, 1992. "Compatibility and Bundling of Complementary Goods in a Duopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 37-54, March.
  32. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  33. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
  34. Nicholas Economides & Fredrick Flyer, 1995. "Technical Standards Coalitions for Network Goods," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 95-12, New York University, Leonard N. Stern School of Business, Department of Economics.
  35. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, December.
  36. Arthur, W Brian, 1989. "Competing Technologies, Increasing Returns, and Lock-In by Historical Events," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(394), pages 116-31, March.
  37. Nicholas Economides & Robert A. Schwartz, 1995. "Equity Trading Practices and Market Structure: Assessing Asset Managers' Demand for Immediacy," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 95-08, New York University, Leonard N. Stern School of Business, Department of Economics.
  38. Nicholas Economides & Charles Himmelberg, 1995. "Critical Mass and Network Size with Application to the US Fax Market," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 95-11, New York University, Leonard N. Stern School of Business, Department of Economics.
  39. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  40. Carmen Matutes & Pierre Regibeau, 1988. ""Mix and Match": Product Compatibility without Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 221-234, Summer.
  41. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 105-23, March.
  42. Shy, O. & Chou, C-F., 1990. "Do Consumers Always Gain When More People Buy The Same Brand?," Papers, Tel Aviv 40-90, Tel Aviv.
  43. Economides, Nicholas, 1989. "Desirability of Compatibility in the Absence of Network Externalities," American Economic Review, American Economic Association, vol. 79(5), pages 1165-81, December.
  44. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
  45. Economides, Nicholas, 1996. "Network externalities, complementarities, and invitations to enter," European Journal of Political Economy, Elsevier, vol. 12(2), pages 211-233, September.
  46. Shmuel S. Oren & Stephen A. Smith, 1981. "Critical Mass and Tariff Structure in Electronic Communications Markets," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 467-487, Autumn.
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