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Lagged Network Externalities and Rationing in a Software Monopoly

  • Di Maria, Corrado

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

  • Köttl, Johannes

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

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.

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Paper provided by Institute for Advanced Studies in its series Economics Series with number 120.

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Length: 16 pages
Date of creation: Jul 2002
Date of revision:
Handle: RePEc:ihs:ihsesp:120
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  1. Luis Cabral & David Salant & Glenn Woroch, 1994. "Monopoly Pricing With Network Externalities," Industrial Organization 9411003, EconWPA.
  2. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  3. Klaus Ritzberger & Werner Güth, 1998. "On durable goods monopolies and the Coase-Conjecture," Review of Economic Design, Springer, vol. 3(3), pages 215-236.
  4. Allen, Franklin & Faulhaber, Gerald R, 1991. "Rational Rationing," Economica, London School of Economics and Political Science, vol. 58(230), pages 189-98, May.
  5. Ritzberger, Klaus, 2002. "Foundations of Non-Cooperative Game Theory," OUP Catalogue, Oxford University Press, number 9780199247868, July.
  6. Juan Ruiz, 2003. "Another Perspective on Planned obsolescence: is there really too much Innovation?," Industrial Organization 0302001, EconWPA.
  7. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
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