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Pricing of Complementary Goods and Network Effects

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Author Info
Nicholas Economides () (Stern School of Business, NYU)
V. Brian Viard () (Graduate School of Business, Stanford University)

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Abstract

We discuss the case of a monopolist of a base good in the presence of complementary goods provided either by it or by other firms. We assess and calibrate the extent of the influence on the profits from the base good that is created by the existence of complementary goods, i.e., the extent of the network effect. We establish an equivalence between a model of a base and a complementary good and a reduced-form model of the base good in which network effects are assumed in the consumers’ utility functions as a surrogate for the presence of complementary goods produced by others. We also assess and calibrate the influence on profits of the intensity of network effects and quality improvements in both goods. We evaluate the incentive that a monopolist of the base good has to improve its quality rather than that of complementary goods. Finally, based on our results, we discuss an explanation of the fact that Microsoft Office has a significantly higher price than Microsoft Windows although both products have comparable market shares.

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Publisher Info
Paper provided by NET Institute in its series Working Papers with number 04-21.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 29 pages
Date of creation: Aug 2004
Date of revision: Aug 2004
Handle: RePEc:net:wpaper:0421

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Web page: http://www.NETinst.org/

For technical questions regarding this item, or to correct its listing, contact: (Nicholas Economides).

Related research
Keywords: calibration; monopoly; network effects; complementary goods; software; Microsoft;

Other versions of this item:

Find related papers by JEL classification:
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques
D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Marc Rysman, 2004. "Competition Between Networks: A Study of the Market for Yellow Pages," Review of Economic Studies, Blackwell Publishing, vol. 71(2), pages 483-512, 04. [Downloadable!] (restricted)
  2. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Blackwell Publishing, vol. 40(1), pages 85-103, March. [Downloadable!] (restricted)
  3. Economides, N., 2001. "The Microsoft Antitrust Case," New York University, Leonard N. Stern School Finance Department Working Paper Seires 01-00, New York University, Leonard N. Stern School of Business-.
  4. Erik Brynjolfsson & Chris F. Kemerer, 1993. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Working Paper Series 158, MIT Center for Coordination Science. [Downloadable!]
  5. Joseph Farrell & Garth Saloner, 1985. "Installed Base and Compatibility With Implications for Product Preannouncements," Working papers 385, Massachusetts Institute of Technology (MIT), Department of Economics.
    Other versions:
  6. 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. [Downloadable!] (restricted)
  7. Neil Gandal & Michael Kende & Rafael Rob, 2000. "The Dynamics of Technological Adoption in Hardware/Software Systems: The Case of Compact Disc Players," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 43-61, Spring.
  8. David Dranove & Neil Gandal, 2003. "The Dvd-vs.-Divx Standard War: Empirical Evidence of Network Effects and Preannouncement Effects," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 12(3), pages 363-386, 09. [Downloadable!] (restricted)
  9. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June. [Downloadable!] (restricted)
  10. 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. [Downloadable!] (restricted)
  11. Economides, Nicholas, 1996. "The economics of networks," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 673-699, October. [Downloadable!] (restricted)
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  12. Economides, Nicholas, 1996. "Network externalities, complementarities, and invitations to enter," European Journal of Political Economy, Elsevier, vol. 12(2), pages 211-233, September. [Downloadable!] (restricted)
    Other versions:
  13. Harikesh Nair & Pradeep Chintagunta & Jean-Pierre Dubé, 2004. "Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants," Quantitative Marketing and Economics, Springer, vol. 2(1), pages 23-58, 03. [Downloadable!]
    Other versions:
  14. Gandal, Neil, 1995. "Competing Compatibility Standards and Network Externalities in the PC Software Market," The Review of Economics and Statistics, MIT Press, vol. 77(4), pages 599-608, November. [Downloadable!] (restricted)
  15. Chou, Chien-fu & Shy, Oz, 1990. "Network effects without network externalities," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 259-270, June. [Downloadable!] (restricted)
  16. Clements, Matthew T., 2004. "Direct and indirect network effects: are they equivalent?," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 633-645, May. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andras Niedermayer, 2005. "Does a Platform Owning Monopolist Want Competition?," Diskussionsschriften dp0517, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
  2. Andras Niedermayer, 2006. "Does a Platform Monopolist Want Competition?," Diskussionsschriften dp0604, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
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