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Interconnecting Differentiated Networks

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Abstract

I examine interconnection decisions of differentiated firms. I find that previous results that firms never interconnect enough do not hold. In a Hotelling model consumers may suffer from interconnection, and firms may interconnect when it is not socially optimal. The firms interconnect too much when the network effects are steeper - this makes firms compete much less aggressively after interconnection, raising prices for consumers and profits for firms. Price and profit rise results holds under quality and installed base asymmetries, or only some firms in the industry interconnecting. More dimensions of differentiation make interconnection less attractive.

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File URL: http://www.netinst.org/Alexandrov_08-07.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 08-07.

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Length: 25 pages
Date of creation: Oct 2008
Date of revision: Oct 2008
Handle: RePEc:net:wpaper:0807

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

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Keywords: network effects; interconnection; oligopoly; product differentiation;

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  1. 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.
  2. Neil Gandal, 2002. "Compatibility, Standardization, and Network Effects: Some Policy Implications," Oxford Review of Economic Policy, Oxford University Press, vol. 18(1), pages 80-91, Spring.
  3. S. J. Liebowitz & Stephen E. Margolis, 1994. "Network Externality: An Uncommon Tragedy," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 133-150, Spring.
  4. Filomena, GARCIA & Cecilia, VERGARI, 2008. "Compatibility Choice in vertically differentiated technologies," Discussion Papers (ECON - Département des Sciences Economiques) 2008012, Université catholique de Louvain, Département des Sciences Economiques.
  5. Suleymanova Irina & Wey Christian, 2011. "Bertrand Competition in Markets with Network Effects and Switching Costs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-58, September.
  6. GRILO, Isabel & SHY, Oz & THISSE, Jacques-François, 1997. "Price competition when consumer behavior is characterized by conformity or vanity," CORE Discussion Papers 1997032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  8. Eric Giraud-Héraud & Hakim Hammoudi & Mahdi Mokrane, 2003. "Multiproduct firm behaviour in a differentiated market," Canadian Journal of Economics, Canadian Economics Association, vol. 36(1), pages 41-61, February.
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