Interconnecting Differentiated Networks
AbstractI 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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Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 08-07.
Length: 25 pages
Date of creation: Oct 2008
Date of revision: Oct 2008
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network effects; interconnection; oligopoly; product differentiation;
Find related papers by JEL classification:
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-21 (All new papers)
- NEP-COM-2008-10-21 (Industrial Competition)
- NEP-MIC-2008-10-21 (Microeconomics)
- NEP-NET-2008-10-21 (Network Economics)
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