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Indirect Network Effects and the Impact of Trade Liberalization: A Note

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  • Kazumichi, Iwasa
  • Kikuchi, Toru

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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  1. Nicholas Economides, 1997. "The Economics of Networks," Industrial Organization 9701002, EconWPA.
  2. David E. Weinstein & Christian Broda, 2004. "Globalization And The Gains From Variety," Econometric Society 2004 Latin American Meetings 327, Econometric Society.
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  5. Desruelle, Dominique & Gaudet, Gerard & Richelle, Yves, 1996. "Complementarity, coordination and compatibility: The role of fixed costs in the economics of systems," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 747-768, October.
  6. Gandal, N. & Shy, O., 1996. "Standardization Policy and International Trade," Papers 12-96, Tel Aviv - the Sackler Institute of Economic Studies.
  7. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  8. Kikuchi, Toru, 2007. "Network Externalities and Comparative Advantage," MPRA Paper 4613, University Library of Munich, Germany.
  9. 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.
  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.
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