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Pricing of Complementary Goods and Network Effects

  • Nicholas Economides
  • V. Brian Viard

We discuss the case of a monopolist of a base good in the presence of a complementary good provided either by it or by another firm. We assess and calibrate the extent of the influence of the profits from the base good that is created by the existence of complementary good, 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 direct or indirect network effects, such as complementary goods produced by other firms. 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 the complementary good under different market structures. Finally, based on our results, we discuss a possible explanation of the fact that Microsoft Office has a significantly higher price that Microsoft Windows although both products have comparable market shares.

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File URL: http://www.stern.nyu.edu/networks/Pricing_of_Complementary_Goods.pdf
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Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 05-12.

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Date of creation: 2005
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Handle: RePEc:ste:nystbu:05-12
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New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126

Phone: (212) 998-0860
Fax: (212) 995-4218
Web page: http://w4.stern.nyu.edu/economics/

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  1. Neil G & al & Michael Kende & Rafael Rob, . "The Dynamics of Technological Adoption in Hardware/Software Systems: The Case of Compact Disc Players," Penn CARESS Working Papers f4df6bc9bda3795823895c786, Penn Economics Department.
  2. Economides, Nicholas, 1996. "The economics of networks," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 673-699, October.
  3. Carmen Matutes & Pierre Regibeau, 1988. ""Mix and Match": Product Compatibility without Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 221-234, Summer.
  4. Nicholas Economides, 2001. "The Microsoft Antitrust Case," Journal of Industry, Competition and Trade, Springer, vol. 1(1), pages 7-39, March.
  5. Shy,Oz, 2001. "The Economics of Network Industries," Cambridge Books, Cambridge University Press, number 9780521800952.
  6. David Dranove & Neil Gandal, 2003. "The Dvd-vs.-Divx Standard War: Empirical Evidence of Network Effects and Preannouncement Effects," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(3), pages 363-386, 09.
  7. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
  8. Erik Brynjolfsson & Chris F. Kemerer, 1993. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Working Paper Series 158, MIT Center for Coordination Science.
  9. Clements, Matthew T., 2004. "Direct and indirect network effects: are they equivalent?," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 633-645, May.
  10. Nicholas Economides, 1997. "Network Externalities, Complementarities, and Invitations to Enter," Industrial Organization 9701004, EconWPA.
  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.
  12. 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, Springer, vol. 2(1), pages 23-58, 03.
  13. Chou, Chien-fu & Shy, Oz, 1990. "Network effects without network externalities," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 259-270, June.
  14. Gandal, Neil, 1995. "Competing Compatibility Standards and Network Externalities in the PC Software Market," The Review of Economics and Statistics, MIT Press, vol. 77(4), pages 599-608, November.
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