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The Welfare Effect of Quality Degradation in the Presence of Network Externalities

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  • Jong-Hee Hahn

    (Department of Economics, Keele University, Keele,)

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

Suggested Citation

  • Jong-Hee Hahn, 2001. "The Welfare Effect of Quality Degradation in the Presence of Network Externalities," Keele Department of Economics Discussion Papers (1995-2001) 2001/08, Department of Economics, Keele University, revised Feb 2003.
    • Handle: RePEc:kee:keeldp:2001/08
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    References listed on IDEAS

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    1. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
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    8. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, June.
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    Cited by:

    1. Corrado Benassi & Marcella Scrimitore, 2017. "Income Distribution in Network Markets," Journal of Industry, Competition and Trade, Springer, vol. 17(3), pages 251-271, September.
    2. Jong‐Hee Hahn, 2006. "Damaged durable goods," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 121-133, March.

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    More about this item

    JEL classification:

    • 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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