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What's on the Menu? Consumption Externalities & Product Quality

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  • Markovich, Sarit
  • Rayo, Luis

Abstract

We consider a monopolistic platform who offers a menu of products differing in quality, such as their level of data privacy. Because of network externalities, the adoption of these products is subject to equilibrium multiplicity, which we handle using a novel notion of focality able to accommodate menus. The optimal menu depends critically on the platform’s focality, with a focal platform trading too little, and a nonfocal one too much, relative to the social optimum. This is because the nonfocal platform relies on consumers with the highest willingness to trade—such as those with the least privacy concerns—to build its network.

Suggested Citation

  • Markovich, Sarit & Rayo, Luis, 2024. "What's on the Menu? Consumption Externalities & Product Quality," CEPR Discussion Papers 19792, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19792
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    File URL: https://cepr.org/publications/DP19792
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