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Pricing of Complementary Goods and Network Effects

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  • Nicholas Economides
  • V. Brian Viard

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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Suggested Citation

  • Nicholas Economides & V. Brian Viard, 2005. "Pricing of Complementary Goods and Network Effects," Working Papers 05-12, New York University, Leonard N. Stern School of Business, Department of Economics.
    • Handle: RePEc:ste:nystbu:05-12
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    References listed on IDEAS

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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. Ewald Scherm & Christian Maaß, 2006. "Zum Stellenwert der Netzwerkökonomik in der Strategie-/Marketingforschung —Eine Analyse empirischer Untersuchungen," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 17(1), pages 27-46, March.
    4. Andras Niedermayer, 2005. "Does a Platform Owning Monopolist Want Competition?," Diskussionsschriften dp0517, Universitaet Bern, Departement Volkswirtschaft.
    5. 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.

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    More about this item

    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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