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Lagged Network Externalities and Rationing in a Software Monopoly

Author

Listed:
  • Di Maria, Corrado

    (Department of Economics and Finance, Institute for Advanced Studies)

  • Köttl, Johannes

    (Department of Economics and Finance, Institute for Advanced Studies)

Abstract

The paper presents a model of a software monopolist who benefits from a lagged network externality arising from consumers' feedback through the so-called bug-fixing effect. That is, the software producer is able to correct errors in the software code detected by previous users, improving her products over time. Another feature of the model is that it responds to the short life cycle of software products, implying time-of-purchase depending utility functions, which are in contrast to the usual durable goods models. Both of these modifications are incorporated in a standard two-periods durable goods monopoly, analysing questions of introductory pricing and quantity rationing. The model suggests that neither of these two instruments is able to explain why we see so much free software in the markets.

Suggested Citation

  • Di Maria, Corrado & Köttl, Johannes, 2002. "Lagged Network Externalities and Rationing in a Software Monopoly," Economics Series 120, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihsesp:120
    as

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    File URL: http://www.ihs.ac.at/publications/eco/es-120.pdf
    File Function: First version, 2002
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    References listed on IDEAS

    as
    1. Juan Ruiz, 2003. "Another Perspective on Planned obsolescence: is there really too much Innovation?," Industrial Organization 0302001, EconWPA.
    2. Allen, Franklin & Faulhaber, Gerald R, 1991. "Rational Rationing," Economica, London School of Economics and Political Science, vol. 58(230), pages 189-198, May.
    3. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
    4. 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.
    5. Ritzberger, Klaus, 2002. "Foundations of Non-Cooperative Game Theory," OUP Catalogue, Oxford University Press, number 9780199247868.
    6. Klaus Ritzberger & Werner Güth, 1998. "On durable goods monopolies and the Coase-Conjecture," Review of Economic Design, Springer;Society for Economic Design, vol. 3(3), pages 215-236.
    7. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-149, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Software monopoly; Lagged network externality; Introductory pricing; Rationing;

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing

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