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Interconnecting Differentiated Networks

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Abstract

I examine interconnection decisions of differentiated firms. I find that previous results that firms never interconnect enough do not hold. In a Hotelling model consumers may suffer from interconnection, and firms may interconnect when it is not socially optimal. The firms interconnect too much when the network effects are steeper - this makes firms compete much less aggressively after interconnection, raising prices for consumers and profits for firms. Price and profit rise results holds under quality and installed base asymmetries, or only some firms in the industry interconnecting. More dimensions of differentiation make interconnection less attractive.

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  • Alexei Alexandrov, 2008. "Interconnecting Differentiated Networks," Working Papers 08-07, NET Institute, revised Oct 2008.
  • Handle: RePEc:net:wpaper:0807
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    File URL: http://www.netinst.org/Alexandrov_08-07.pdf
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    References listed on IDEAS

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    10. repec:oup:jcomle:v:4:y:2008:i:2:p:207-262. is not listed on IDEAS
    11. repec:oup:jcomle:v:4:y:2008:i:4:p:915-966. is not listed on IDEAS
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    More about this item

    Keywords

    network effects; interconnection; oligopoly; product differentiation;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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