Competing with Network Externalities and Price Discrimination
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.
|Date of creation:||Jul 2001|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Caillaud, Bernard & Jullien, Bruno, 2001. "Competing cybermediaries," European Economic Review, Elsevier, vol. 45(4-6), pages 797-808, May.
- Vives, X., 1988.
"Nash Equilibrium With Strategic Complementarities,"
UFAE and IAE Working Papers
107-88, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- Nicholas Economides, 1997.
"The Economics of Networks,"
Brazilian Electronic Journal of Economics,
Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), pages -, December.
- Arthur, W Brian, 1989. "Competing Technologies, Increasing Returns, and Lock-In by Historical Events," Economic Journal, Royal Economic Society, vol. 99(394), pages 116-31, March.
- Cabral, Luis M. B. & Salant, David J. & Woroch, Glenn A., 1999.
"Monopoly pricing with network externalities,"
International Journal of Industrial Organization,
Elsevier, vol. 17(2), pages 199-214, February.
- Bensaid, Bernard & Lesne, Jean-Philippe, 1996. "Dynamic monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 837-855, October.
- 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.
- Raymond J. Deneckere & R. Preston McAfee, 1996.
Journal of Economics & Management Strategy,
Wiley Blackwell, vol. 5(2), pages 149-174, 06.
- Caillaud, Bernard & Jullien, Bruno, 2001. "Chicken and Egg: Competing Matchmakers," CEPR Discussion Papers 2885, C.E.P.R. Discussion Papers.
- Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
- David, Paul A, 1985. "Clio and the Economics of QWERTY," American Economic Review, American Economic Association, vol. 75(2), pages 332-337, May.
- Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:2883. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.