On the (Mis-) Alignment of Consumer and Social Welfare in Markets with Network Effects
We analyze duopoly Bertrand competition under network effects. We consider both incompatible and compatible products. Our main result is that network effects create a fundamental conflict between the maximization of social welfare and consumer surplus whenever products are incompatible. While consumer surplus is highest in the symmetric equilibrium, social welfare is highest in the asymmetric equilibrium. We also show that both consumer surplus and social welfare are higher in any equilibrium under compatibility when compared with incompatible products. However, .firms never have strict incentives to achieve compatibility. Finally, we show the robustness of our results when products are horizontally differentiated.
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- Farrell, Joseph & Klemperer, Paul, 2006.
"Coordination and Lock-In: Competition with Switching Costs and Network Effects,"
CEPR Discussion Papers
5798, C.E.P.R. Discussion Papers.
- Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, Elsevier.
- Farrell, Joseph & Klemperer, Paul, 2006. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Competition Policy Center, Working Paper Series qt9n26k7v1, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
- Joseph Farrell & Paul Klemperer, 2006. "Co-ordination and Lock-in: Competition with Switching Costs and Network Effects," Economics Papers 2006-W07, Economics Group, Nuffield College, University of Oxford.
- Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
- Farrell, Joseph, 1989.
"Converters, Compatibility, and the Control of Interfaces,"
Department of Economics, Working Paper Series
qt8161p50b, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Farrell, Joseph & Saloner, Garth, 1992. "Converters, Compatibility, and the Control of Interfaces," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 9-35, March.
- Joseph Farrell and Garth Saloner., 1989. "Converters, Compatibility, and the Control of Interfaces," Economics Working Papers 89-130, University of California at Berkeley.
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