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Indirect Network Effects and the Impact of Trade Liberalization: A Note

  • Kazumichi, Iwasa
  • Kikuchi, Toru

Indirect network effects exist when the utility of consumers is increasing in the variety of complementary software products available for use with an electronic hardware device. In this note, we examine how trade liberalization affects production structure in the presence of indirect network effects. For these purposes we construct a simple two-country model of trade with two incompatible hardware technologies. It is shown that, given that both types of hardware exist before trade liberalization, liberalization may reduce the variety of hardware technology via intensified network effects. It is also shown that, contrary to the findings of previous studies, some consumers may become worse off as the result of trade. In other words, trade liberalization, which forms the basis for a greater variety of software products, may work as a catalyst for Pareto inferior outcomes.

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File URL: http://mpra.ub.uni-muenchen.de/8662/1/MPRA_paper_8662.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8662.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:8662
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  1. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
  2. Desruelle, Dominique & Gaudet, Gerard & Richelle, Yves, 1996. "Complementarity, coordination and compatibility: The role of fixed costs in the economics of systems," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 747-768, October.
  3. Church, Jeffrey & Gandal, Neil, 1996. "Strategic entry deterrence: Complementary products as installed base," European Journal of Political Economy, Elsevier, vol. 12(2), pages 331-354, September.
  4. Chien-Fu Chou & Oz Shy, 1991. "Intra-industry Trade and the Variety of Home Products," Canadian Journal of Economics, Canadian Economics Association, vol. 24(2), pages 405-16, May.
  5. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  6. Christian Broda & David Weinstein, 2004. "Globalization and the gains from variety," Staff Reports 180, Federal Reserve Bank of New York.
  7. Gandal, Neil & Shy, Oz, 2001. "Standardization policy and international trade," Journal of International Economics, Elsevier, vol. 53(2), pages 363-383, April.
  8. Chou, Chien-fu & Shy, Oz, 1996. "Do consumers gain or lose when more people buy the same brand," European Journal of Political Economy, Elsevier, vol. 12(2), pages 309-330, September.
  9. Henkel, Joachim & Stahl, Konrad & Walz, Uwe, 2000. "Coalition Building in a Spatial Economy," Journal of Urban Economics, Elsevier, vol. 47(1), pages 136-163, January.
  10. Kikuchi, Toru, 2007. "Network Externalities and Comparative Advantage," MPRA Paper 4613, University Library of Munich, Germany.
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