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Networks, Network Externalities and Market Segmentation

Author

Listed:
  • A. Banerji

    (Delhi School of Economics)

  • Bhaskar Dutta

    (University of Warwick)

Abstract

This paper models interaction between groups of agents by means of a graph where each node represents a group of agents and an arc represents bilateral interaction. It departs from the standard Katz-Shapiro framework by assuming that network benefits are restricted only amongst groups of linked agents. It shows that even if rival firms engage in Bertrand competition, this form of network externalities permits strong market segmentation in which firms divide up the market and earn positive profits.

Suggested Citation

  • A. Banerji & Bhaskar Dutta, 2004. "Networks, Network Externalities and Market Segmentation," Working papers 124, Centre for Development Economics, Delhi School of Economics.
  • Handle: RePEc:cde:cdewps:124
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    File URL: http://www.cdedse.org/pdf/work124.pdf
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    References listed on IDEAS

    as
    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. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
    3. Mark Armstrong, 2006. "Competition in two‐sided markets," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 668-691, September.
    4. 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 105-123, March.
    5. Farrell, Joseph & Katz, Michael L, 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 48(4), pages 413-432, December.
    6. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
    7. Glenn Ellison & Drew Fudenberg, 2000. "The Neo-Luddite's Lament: Excessive Upgrades in the Software Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 253-272, Summer.
    8. 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.
    9. Joseph Farrell & Garth Saloner, 1985. "Installed Base and Compatibility With Implications for Product Preannouncements," Working papers 385, Massachusetts Institute of Technology (MIT), Department of Economics.
    10. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    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 822-841, August.
    12. Michael Waldman, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 273-283.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    network structure; network externalities; price competition; market segmentation.;

    JEL classification:

    • D7 - Microeconomics - - Analysis of Collective Decision-Making

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