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Indirect Network Effects and Adoption Externalities

  • Church Jeffrey

    ()

    (Department of Economics, University of Calgary)

  • Gandal Neil

    (Department of Public Policy, Tel Aviv University and CEPR)

  • Krause David

    (Economic Analysis, Bell Canada)

Can indirect network effects lead to adoption externalities? If so, when? We show that in markets where consumption benefits arise from hardware/software systems, adoption externalities will occur when there are (i) increasing returns to scale in the production of software, (ii) free entry in software, and (iii) consumers have a preference for software variety. The private benefit of the marginal hardware purchaser is less than the social benefit since the marginal hardware purchaser does not internalize the welfare improving response of the software industry, particularly the increase in software variety, on inframarginal purchasers when the market for hardware expands.

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Article provided by De Gruyter in its journal Review of Network Economics.

Volume (Year): 7 (2008)
Issue (Month): 3 (September)
Pages: 1-22

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Handle: RePEc:bpj:rneart:v:7:y:2008:i:3:n:1
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