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Competing with Network Externalities and Price Discrimination

  • Jullien, Bruno

This Paper examines competition between a dominant network and a challenging network with third-degree or perfect price-discrimination, allowing for arbitrary configurations of network externalities, as well as horizontal and vertical product differentiation. Domination in the coordination game played by consumers is achieved through an adequate resolution that favours one firm over the other, and is interpreted as a reputation effect. Price-discrimination in this context has a strong impact because cross-subsidisation allows a firm to coordinate the choices of consumers, reducing the impact of reputation effects. Competitive strategies subsidize the participation of some consumers in order to create a bandwagon effect on others. This drastically intensifies competition and reduces average equilibrium prices. Because bandwagon effects are due to the incompatibility of networks, under perfect price-discrimination, both networks prefer to be compatible. Price-discrimination promotes efficiency by reducing the extent of excess inertia, but new features of excess momentum and market instability appear. A network may also have incentives to unilaterally degrade the quality for some targeted group of consumers in order to weaken competition.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2883.

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Date of creation: Jul 2001
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Handle: RePEc:cpr:ceprdp:2883
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  1. Innes, Robert & Sexton, Richard J., 1993. "Customer coalitions, monopoly price discrimination and generic entry deterrence," European Economic Review, Elsevier, vol. 37(8), pages 1569-1597, December.
  2. Luis Cabral & David Salant & Glenn Woroch, 1994. "Monopoly Pricing With Network Externalities," Industrial Organization 9411003, EconWPA.
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  8. Caillaud, Bernard & Jullien, Bruno, 2001. "Competing cybermediaries," European Economic Review, Elsevier, vol. 45(4-6), pages 797-808, May.
  9. Vives, Xavier, 1990. "Nash equilibrium with strategic complementarities," Journal of Mathematical Economics, Elsevier, vol. 19(3), pages 305-321.
  10. David, Paul A, 1985. "Clio and the Economics of QWERTY," American Economic Review, American Economic Association, vol. 75(2), pages 332-37, May.
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