The Welfare Effect of Quality Degradation in the Presence of Network Externalities
AbstractThis 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 InfoPaper provided by Department of Economics, Keele University in its series Keele Department of Economics Discussion Papers (1995-2001) with number 2001/08.
Length: 24 pages
Date of creation: 2001
Date of revision: Feb 2003
Publication status: Published in Information Economics and Policy, 2004, vol. 16, issue 4, pages 535-552. [ doi:10.1016/j.infoecopol.2003.07.002 ]
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Postal: Department of Economics, Keele University, Keele, Staffordshire ST5 5BG - United Kingdom
Other versions of this item:
- Hahn, Jong-Hee, 2004. "The welfare effect of quality degradation in the presence of network externalities," Information Economics and Policy, Elsevier, vol. 16(4), pages 535-552, December.
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
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