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Critical Mass and Tariff Structure in Electronic Communications Markets

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  • Shmuel S. Oren
  • Stephen A. Smith

Abstract

Most communication services have a demand "externality" in that the benefit to a subscriber depends upon how many of his communication partners also subscribe. This article develops an economic model that determines both the required critical mass size for startup and the ultimate expansion level of such a system. The effects of different pricing structures for the service are evaluated under the assumption that users maximize benefits minus cost and a monopoly supplier maximizes profit.

Suggested Citation

  • 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.
  • Handle: RePEc:rje:bellje:v:12:y:1981:i:autumn:p:467-487
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    Citations

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    Cited by:

    1. Okada, Yosuke & Hatta, Keiko, 1999. "The Interdependent Telecommunications Demand and Efficient Price Structure," Journal of the Japanese and International Economies, Elsevier, vol. 13(4), pages 311-335, December.
    2. Kanemoto, Yoshitsugu, 2000. "Price and quantity competition among heterogeneous suppliers with two-part pricing: applications to clubs, local public goods, networks, and growth controls," Regional Science and Urban Economics, Elsevier, vol. 30(6), pages 587-608, December.
    3. Schade, Sven & Buxmann, Peter, 2005. "A Prototype to Analyse and Support Standardization Decisions," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 35795, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    4. Amir, Rabah & Lazzati, Natalia, 2011. "Network effects, market structure and industry performance," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2389-2419.
    5. Sillanpää, Antti & Laamanen, Tomi, 2009. "Positive and negative feedback effects in competition for dominance of network business systems," Research Policy, Elsevier, vol. 38(5), pages 871-884, June.
    6. Hahn, Jong-Hee, 2003. "Nonlinear pricing of telecommunications with call and network externalities," International Journal of Industrial Organization, Elsevier, vol. 21(7), pages 949-967, September.
    7. Cyrus C.Y. Chu & Hung-Ken Chien, 2005. "Durable-Goods Monopolists, Network Effects and Penetration Pricing," IEAS Working Paper : academic research 05-A001, Institute of Economics, Academia Sinica, Taipei, Taiwan.
    8. Mitomo, Hitoshi, 2017. "Data Network Effects: Implications for Data Business," 28th European Regional ITS Conference, Passau 2017 169484, International Telecommunications Society (ITS).
    9. Chou, Yen-Chun & Hao-Chun Chuang, Howard & Shao, Benjamin B.M., 2014. "The impacts of information technology on total factor productivity: A look at externalities and innovations," International Journal of Production Economics, Elsevier, vol. 158(C), pages 290-299.
    10. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
    11. Shanjun Li & Yiyi Zhou, 2015. "Dynamics of Technology Adoption and Critical Mass: The Case of U.S. Electric Vehicle Market," Working Papers 15-10, NET Institute.
    12. Economides, Nicholas, 1996. "Network externalities, complementarities, and invitations to enter," European Journal of Political Economy, Elsevier, vol. 12(2), pages 211-233, September.
    13. Chichilnisky, Graciela, 1995. "The evolution of a global network: a game of coalition formation," MPRA Paper 8487, University Library of Munich, Germany.
    14. Funk, Jeffrey L., 2003. "Standards, dominant designs and preferential acquisition of complementary assets through slight information advantages," Research Policy, Elsevier, vol. 32(8), pages 1325-1341, September.
    15. Hung-Ken Chien & C. Y. Cyrus Chu, 2008. "Sale or Lease? Durable-Goods Monopoly with Network Effects," Marketing Science, INFORMS, vol. 27(6), pages 1012-1019, 11-12.
    16. Denis Becker & Alexei Gaivoronski, 2014. "Stochastic optimization on social networks with application to service pricing," Computational Management Science, Springer, vol. 11(4), pages 531-562, October.
    17. Etziony Amir & Weiss Avi, 2012. "Inviting Competition to Achieve Critical Mass," Review of Network Economics, De Gruyter, vol. 11(2), pages 1-22, June.
    18. Weiss, Avi & Etziony, Amir, 2015. "The role of critical mass in establishing a successful network market: An experimental investigationAuthor-Name: Ruffle, Bradley J," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 58(C), pages 101-110.
    19. Jing, Bing, 2007. "Network externalities and market segmentation in a monopoly," Economics Letters, Elsevier, vol. 95(1), pages 7-13, April.
    20. Corneo, Giacomo & Jeanne, Olivier, 1997. "Snobs, bandwagons, and the origin of social customs in consumer behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 32(3), pages 333-347, March.

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