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Pricing of Complementary Goods and Network Effects

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Abstract

We discuss the case of a monopolist of a base good in the presence of complementary goods provided either by it or by other firms. We assess and calibrate the extent of the influence on the profits from the base good that is created by the existence of complementary goods, i.e., the extent of the network effect. We establish an equivalence between a model of a base and a complementary good and a reduced-form model of the base good in which network effects are assumed in the consumers’ utility functions as a surrogate for the presence of complementary goods produced by others. We also assess and calibrate the influence on profits of the intensity of network effects and quality improvements in both goods. We evaluate the incentive that a monopolist of the base good has to improve its quality rather than that of complementary goods. Finally, based on our results, we discuss an explanation of the fact that Microsoft Office has a significantly higher price than Microsoft Windows although both products have comparable market shares.

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  • Nicholas Economides & V. Brian Viard, 2004. "Pricing of Complementary Goods and Network Effects," Working Papers 04-21, NET Institute, revised Aug 2004.
  • Handle: RePEc:net:wpaper:0421
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    1. Farrell, Joseph & Saloner, Garth, 1986. "Installed Base and Compatibility: Innovation, Product Preannouncements, and Predation," American Economic Review, American Economic Association, vol. 76(5), pages 940-955, December.
    2. Nicholas Economides, 2001. "The Microsoft Antitrust Case," Journal of Industry, Competition and Trade, Springer, vol. 1(1), pages 7-39, March.
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    7. Neil Gandal & Michael Kende & Rafael Rob, 2000. "The Dynamics of Technological Adoption in Hardware/Software Systems: The Case of Compact Disc Players," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 43-61, Spring.
    8. Harikesh Nair & Pradeep Chintagunta & Jean-Pierre Dubé, 2004. "Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants," Quantitative Marketing and Economics (QME), Springer, vol. 2(1), pages 23-58, March.
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    11. Marc Rysman, 2004. "Competition Between Networks: A Study of the Market for Yellow Pages," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 483-512.
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    Cited by:

    1. Andras Niedermayer, 2006. "Does a Platform Monopolist Want Competition?," Diskussionsschriften dp0604, Universitaet Bern, Departement Volkswirtschaft.
    2. Michel Fok, 2009. "Restructurer efficacement les filières cotonnières en Afrique : les leçons de la déréglementation des réseaux de service en Occident," Post-Print halshs-00476447, HAL.
    3. Andras Niedermayer, 2005. "Does a Platform Owning Monopolist Want Competition?," Diskussionsschriften dp0517, Universitaet Bern, Departement Volkswirtschaft.
    4. Niedermayer, Andreas, 2015. "Does a Platform Monopolist Want Competition?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 523, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

    More about this item

    Keywords

    calibration; monopoly; network effects; complementary goods; software; Microsoft;

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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