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Pricing of Complementary Goods and Network Effects

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  • 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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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/

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

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References

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  1. Shy,Oz, 2001. "The Economics of Network Industries," Cambridge Books, Cambridge University Press, number 9780521805001, 9.
  2. 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.
  3. 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.
  4. Marc Rysman, 2004. "Competition Between Networks: A Study of the Market for Yellow Pages," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 483-512.
  5. Erik Brynjolfsson & Chris F. Kemerer, 1996. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Management Science, INFORMS, INFORMS, vol. 42(12), pages 1627-1647, December.
  6. Chou, Chien-fu & Shy, Oz, 1990. "Network effects without network externalities," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 8(2), pages 259-270, June.
  7. Gandal, N. & Kende, M. & Rob, R., 1997. "The Dynamics of Technological Adoption in Hardware/Software Systems: The Case of Compact Disc Players," Papers, Tel Aviv 21-97, Tel Aviv.
  8. Nicholas Economides, 1995. "The Economics of Networks," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 94-24, New York University, Leonard N. Stern School of Business, Department of Economics, revised Sep 1995.
  9. 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.
  10. Clements, Matthew T., 2004. "Direct and indirect network effects: are they equivalent?," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 22(5), pages 633-645, May.
  11. Marc Rysman, 2004. "Competition Between Networks: A�Study of the Market for Yellow�Pages," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 71(2), pages 483-512, 04.
  12. Nicholas Economides, 1997. "Network Externalities, Complementarities, and Invitations to Enter," Industrial Organization, EconWPA 9701004, EconWPA.
  13. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
  14. 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, Springer, vol. 2(1), pages 23-58, 03.
  15. Economides, N., 2001. "The Microsoft Antitrust Case," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 01-00, New York University, Leonard N. Stern School of Business-.
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Cited by:
  1. Andras Niedermayer, 2005. "Does a Platform Owning Monopolist Want Competition?," Diskussionsschriften, Universitaet Bern, Departement Volkswirtschaft dp0517, Universitaet Bern, Departement Volkswirtschaft.
  2. Michel Fok, 2009. "Restructurer efficacement les filières cotonnières en Afrique : les leçons de la déréglementation des réseaux de service en Occident," Post-Print halshs-00476447, HAL.
  3. Andras Niedermayer, 2006. "Does a Platform Monopolist Want Competition?," Diskussionsschriften, Universitaet Bern, Departement Volkswirtschaft dp0604, Universitaet Bern, Departement Volkswirtschaft.

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