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Networks, Network Externalities and Market Segmentation

  • A. Banerji

    (Delhi School of Economics)

  • Bhaskar Dutta

    (University of Warwick)

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.

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Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 124.

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Length: 20 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:cde:cdewps:124
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  1. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  2. Joseph Farrell & Garth Saloner, 1984. "Standardization, Compatibility and Innovation," Working papers 345, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Nicholas Economides, 1997. "The Economics of Networks," Industrial Organization 9701002, EconWPA.
  4. Farrell, Joseph & Katz, Michael, 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Department of Economics, Working Paper Series qt15k4v7xb, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Glenn Ellison & Drew Fudenberg, 1999. "The Neo-Luddite's Lament: Excessive Upgrades in the Software Industry," Harvard Institute of Economic Research Working Papers 1870, Harvard - Institute of Economic Research.
  6. 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.
  7. Matthew O. Jackson & Asher Wolinsky, 1994. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Mark Armstrong, 2005. "Competition in Two-Sided Markets," Industrial Organization 0505009, EconWPA.
  9. Joseph Farrell & Garth Saloner, 1986. "Installed Base and Compatibility, With Implications for Product Preannouncements," Working papers 411, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. 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.
  11. Waldman, Michael, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 273-83, February.
  12. 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.
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