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Pricing of Complementary Goods and Network Effects

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Author Info

  • Nicholas Economides

    ()
    (Stern School of Business, New York University)

  • V. Brian Viard

    ()
    (Graduate School of Business, Stanford University)

Abstract

We discuss the case of a monopolist of a base good in the presence of a complementary good provided either by it or by another firm. We assess and calibrate the extent of the influence on the profits from the base good that is created by the existence of the complementary good, 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 direct or indirect network effects, such as complementary goods produced by other firms. 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 the complementary good under different market structures. Finally, based on our results, we discuss a possible 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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File URL: http://www.stern.nyu.edu/networks/Pricing_of_Complementary_Goods.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 05-31.

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Length: 33 pages
Date of creation: Nov 2005
Date of revision: Nov 2005
Handle: RePEc:net:wpaper:0531

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

Related research

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

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References

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  1. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
  2. Nicholas Economides, 2001. "The Microsoft Antitrust Case," Journal of Industry, Competition and Trade, Springer, vol. 1(1), pages 7-39, March.
  3. 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.
  4. Nicholas Economides, 1997. "The Economics of Networks," Industrial Organization 9701002, EconWPA.
  5. 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.
  6. Nicholas Economides, 1997. "Network Externalities, Complementarities, and Invitations to Enter," Industrial Organization 9701004, EconWPA.
  7. 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.
  8. Nair, Harikesh S. & Chintagunta, Pradeep & Dube, Jean-Pierre, 2003. "Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants," Research Papers 1948, Stanford University, Graduate School of Business.
  9. David Dranove & Neil Gandal, 2003. "The Dvd-vs.-Divx Standard War: Empirical Evidence of Network Effects and Preannouncement Effects," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(3), pages 363-386, 09.
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Cited by:
  1. Andras Niedermayer, 2006. "Does a Platform Monopolist Want Competition?," Diskussionsschriften dp0604, Universitaet Bern, Departement Volkswirtschaft.
  2. Andras Niedermayer, 2005. "Does a Platform Owning Monopolist Want Competition?," Diskussionsschriften dp0517, Universitaet Bern, Departement Volkswirtschaft.

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