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Indirect Network E ects and the Impact of Trade Liberalization: A Note

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Author Info
Kazumichi, Iwasa
Kikuchi, Toru

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Abstract

Indirect network effects exist when the utility of consumers is increasing in the variety of complementary software products available for use with an electronic hardware device. In this note, we examine how trade liberalization affects production structure in the presence of indirect network effects. For these purposes we construct a simple two-country model of trade with two incompatible hardware technologies. It is shown that, given that both types of hardware exist before trade liberalization, liberalization may reduce the variety of hardware technology via intensified network effects. It is also shown that, contrary to the findings of previous studies, some consumers may become worse off as the result of trade. In other words, trade liberalization, which forms the basis for a greater variety of software products, may work as a catalyst for Pareto inferior outcomes.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8662.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:8662

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F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies

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  1. Toru Kikuchi, 2007. "Network Externalities And Comparative Advantage," Bulletin of Economic Research, Blackwell Publishing, vol. 59(4), pages 327-337, October. [Downloadable!] (restricted)
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  2. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains from Variety," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 541-585, May. [Downloadable!] (restricted)
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  3. Dominique Desruelle & Gerard Gaudet & Yves Richelle, 1995. "Complementarity, Coordination and Compatibility: The Role of Fixed Costs in the Economics of Systems," Industrial Organization 9508001, EconWPA, revised 14 Aug 1995. [Downloadable!]
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  4. Chou, Chien-fu & Shy, Oz, 1996. "Do consumers gain or lose when more people buy the same brand," European Journal of Political Economy, Elsevier, vol. 12(2), pages 309-330, September. [Downloadable!] (restricted)
  5. Henkel, Joachim & Stahl, Konrad & Walz, Uwe, 2000. "Coalition Building in a Spatial Economy," Journal of Urban Economics, Elsevier, vol. 47(1), pages 136-163, January. [Downloadable!] (restricted)
  6. Church, Jeffrey & Gandal, Neil, 1996. "Strategic entry deterrence: Complementary products as installed base," European Journal of Political Economy, Elsevier, vol. 12(2), pages 331-354, September. [Downloadable!] (restricted)
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  7. Gandal, Neil & Shy, Oz, 2001. "Standardization policy and international trade," Journal of International Economics, Elsevier, vol. 53(2), pages 363-383, April. [Downloadable!] (restricted)
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  8. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December. [Downloadable!]
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  9. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  10. Chien-Fu Chou & Oz Shy, 1991. "Intra-industry Trade and the Variety of Home Products," Canadian Journal of Economics, Canadian Economics Association, vol. 24(2), pages 405-16, May. [Downloadable!] (restricted)
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