Pricing of Complementary Goods and Network Effects
AbstractWe 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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Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 05-31.
Length: 33 pages
Date of creation: Nov 2005
Date of revision: Nov 2005
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Web page: http://www.NETinst.org/
calibration; monopoly; network effects; complementary goods; software; Microsoft;
Other versions of this item:
- Nicholas Economides & V. Brian Viard, 2004. "Pricing of Complementary Goods and Network Effects," Working Papers 04-21, NET Institute, revised Aug 2004.
- Nicholas Economides & V. Brian Viard, 2005. "Pricing of Complementary Goods and Network Effects," Working Papers 05-12, New York University, Leonard N. Stern School of Business, Department of Economics.
- Nicholas Economides & Brian Viard, 2003. "Pricing of Complementary Goods and Network Effects," Working Papers 03-12, New York University, Leonard N. Stern School of Business, Department of Economics.
- Nicholas Economides & Brian Viard, 2004. "Pricing of Complementary Goods and Network Effects," Industrial Organization 0407005, EconWPA.
- Nicholas Economides & V. Brian Viard, 2005. "Pricing of Complementary Goods and Network Effects," Working Papers 05-04, NET Institute, revised Nov 2005.
- 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; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-08-26 (All new papers)
- NEP-COM-2006-08-26 (Industrial Competition)
- NEP-ICT-2006-08-26 (Information & Communication Technologies)
- NEP-MIC-2006-08-26 (Microeconomics)
- NEP-NET-2006-08-26 (Network Economics)
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