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The Economics of Networks

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  • Nicholas Economides

    (Stern School of Business, New York University)

Abstract

We analyze the salient features of networks and point out the similarities between the economic structure of networks and the structure of vertically related industries. The analysis focuses on positive consumption and production externalities, commonly called network externalities. We discuss their sources and their effects on pricing and market structure. We distinguish between results that do not depend on the underlying industry microstructure (the "macro" approach) and those that do (the "micro" approach). We analyze the issues of compatibility, coordination to technical standards, interconnection and interoperability, and their effects on pricing and quality of services and on the value of network links in various ownership structures. We also briefly discuss the issue of interconnection fees for bottleneck facilities.

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Bibliographic Info

Paper provided by EconWPA in its series Industrial Organization with number 9701002.

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Length: 37 pages
Date of creation: 22 Jan 1997
Date of revision:
Handle: RePEc:wpa:wuwpio:9701002

Note: Type of Document - PDF/PostScript; prepared on IBM PC; to print on HP; pages: 37; figures: included/request from author/draw your own. Published in International Journal of Industrial Organization, vol. 16, no. 4
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References

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  1. Joseph Farrell and Garth Saloner., 1988. "Coordination through Committees and Markets," Economics Working Papers 8864, University of California at Berkeley.
  2. Matutes, Carmen & Regibeau, Pierre, 1992. "Compatibility and Bundling of Complementary Goods in a Duopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 37-54, March.
  3. Encaoua, D. & Moreaux, M. & Perrot, A., 1992. "Demand-Side Network Effect in Airline Markets," Papiers d'Economie Mathématique et Applications 92.28, Université Panthéon-Sorbonne (Paris 1).
  4. Economides, Nicholas & White, Lawrence J., 1994. "Networks and compatibility: Implications for antitrust," European Economic Review, Elsevier, vol. 38(3-4), pages 651-662, April.
  5. Farrell, Joseph, 1989. "Converters, Compatibility, and the Control of Interfaces," Department of Economics, Working Paper Series qt8161p50b, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  6. Katz, Michael L & Shapiro, Carl, 1986. "Product Compatibility Choice in a Market with Technological Progress," Oxford Economic Papers, Oxford University Press, vol. 38(0), pages 146-65, Suppl. No.
  7. Shy, O. & Chou, C-F., 1990. "Do Consumers Always Gain When More People Buy The Same Brand?," Papers 40-90, Tel Aviv.
  8. Nicholas Economides,, . "How to Enhance Market Liquidity," Financial Networks _002, Economics of Networks.
  9. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-65, March.
  10. Nicholas Economides & Robert A. Schwartz, 1995. "Equity Trading Practices and Market Structure: Assessing Asset Managers' Demand for Immediacy," Working Papers 95-08, New York University, Leonard N. Stern School of Business, Department of Economics.
  11. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
  12. Shmuel S. Oren & Stephen A. Smith, 1981. "Critical Mass and Tariff Structure in Electronic Communications Markets," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 467-487, Autumn.
  13. Nicholas S. Economides & Glenn A. Woroch, 1992. "Benefits and Pitfalls of Network Interconnection," Working Papers 92-31, New York University, Leonard N. Stern School of Business, Department of Economics.
  14. Nicholas Economides, 1997. "Network Externalities, Complementarities, and Invitations to Enter," Industrial Organization 9701004, EconWPA.
  15. Garbade, Kenneth D & Silber, William L, 1976. "Price Dispersion in the Government Securities Market," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 721-40, August.
  16. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
  17. Nicholas Economides & Fredrick Flyer, 1995. "Technical Standards Coalitions for Network Goods," Working Papers 95-12, New York University, Leonard N. Stern School of Business, Department of Economics.
  18. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
  19. Nicholas Economides, 1994. "Quality Choice and Vertical Integration," Working Papers 94-22, New York University, Leonard N. Stern School of Business, Department of Economics.
  20. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  21. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Price competition, quality and income disparities," CORE Discussion Papers RP -370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  22. Church, J. & Gandal, N., 1992. "Integration, Complementary Products and Variety," Papers 3-92, Tel Aviv.
  23. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
  24. Nicholas Economides & Lawrence J. White, 1997. "The Inefficiency of the ECPR Yet Again: A Reply to Larson," Industrial Organization 9703001, EconWPA.
  25. Economides, Nicholas, 1989. "Desirability of Compatibility in the Absence of Network Externalities," American Economic Review, American Economic Association, vol. 79(5), pages 1165-81, December.
  26. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  27. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 105-23, March.
  28. Matutes, Carmen & Regibeau, Pierre, 1989. "Standardization across Markets and Entry," Journal of Industrial Economics, Wiley Blackwell, vol. 37(4), pages 359-71, June.
  29. Garbade, Kenneth D & Silber, William L, 1979. "Structural Organization of Secondary Markets: Clearing Frequency, Dealer Activity and Liquidity Risk," Journal of Finance, American Finance Association, vol. 34(3), pages 577-93, June.
  30. David, Paul A, 1985. "Clio and the Economics of QWERTY," American Economic Review, American Economic Association, vol. 75(2), pages 332-37, May.
  31. Liebowitz, S J & Margolis, Stephen E, 1990. "The Fable of the Keys," Journal of Law and Economics, University of Chicago Press, vol. 33(1), pages 1-25, April.
  32. Shy, O. & Chou, C-F., 1990. "Partially Compatible Brands And Consumer Welfare," Papers 34-90, Tel Aviv.
  33. Economides, Nicholas & Siow, Aloysius, 1988. "The Division of Markets is Limited by the Extent of Liquidity (Spatial Competition with Externalities)," American Economic Review, American Economic Association, vol. 78(1), pages 108-21, March.
  34. Berg, Sanford V., 1988. "Duopoly compatibility standards with partial cooperation and standards leadership," Information Economics and Policy, Elsevier, vol. 3(1), pages 35-53.
  35. Nicholas Economides & Charles Himmelberg, 1995. "Critical Mass and Network Size with Application to the US Fax Market," Working Papers 95-11, New York University, Leonard N. Stern School of Business, Department of Economics.
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