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Network Externalities and the Overprovision of Quality by a Monopolist

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  • Luca Lambertini
  • Raimondello Orsini

Abstract

We investigate the behavior of a monopolist supplying a vertically differentiated good with network externalities. Assuming a convex unit cost of quality improvements, we show that the presence of network externalities may yield oversupply of quality compared with the social optimum, when partial market coverage emerges at equilibrium. Overall, the incentive to expand output increases in the extent of network externalities, thereby partially counterbalancing the social damage produced by the quality distortion.

Suggested Citation

  • Luca Lambertini & Raimondello Orsini, 2001. "Network Externalities and the Overprovision of Quality by a Monopolist," Southern Economic Journal, John Wiley & Sons, vol. 67(4), pages 969-982, April.
    • Handle: RePEc:wly:soecon:v:67:y:2001:i:4:p:969-982
    DOI: 10.1002/j.2325-8012.2001.tb00384.x
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    References listed on IDEAS

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    1. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
    2. L. Lambertini, 1995. "The Multiproduct Monopolist Under Vertical Differentiation: an Inductive Approach," Working Papers 226, Dipartimento Scienze Economiche, Universita' di Bologna.
    3. 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 822-841, August.
    4. Farrell, Joseph & Saloner, Garth, 1986. "Standardization and variety," Economics Letters, Elsevier, vol. 20(1), pages 71-74.
    5. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    6. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
    7. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
    8. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    9. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
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    Cited by:

    1. Yi-Ling Cheng & Hsiang-Yun Huang, 2025. "Quality competition and product compatibility in network industries," Journal of Economics, Springer, vol. 145(1), pages 31-57, June.

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