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Local Network Externalities and Market Segmentation

  • Banerji, A

    (Delhi School of Economics, University of Delhi)

  • Dutta, Bhaskar

    (Department of Economics, University of Warwick,)

This paper models interaction between groups of agents by means of a graph where each node represents a group of agents and an arc represents bilateral interaction. It departs from the standard Katz-Shapiro framework by assuming that network benefits are restricted only amongst groups of linked agents. It shows that even if rival firms engage in Bertrand competition, this form of network externalities permits strong market segmentation in which firms divide up the market and earn positive profits. The analysis also shows that some graphs or network structures do not permit such segmentation, while for others, there are easy to interpret conditions under which market segmentation obtains in equilibrium

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_725.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 725.

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Length: 29 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:wrk:warwec:725
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Web page: http://www2.warwick.ac.uk/fac/soc/economics/

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  1. repec:hrv:faseco:4589709 is not listed on IDEAS
  2. Cabral, Luís M B, 2008. "Dynamic Price Competition with Network Effects," CEPR Discussion Papers 6687, C.E.P.R. Discussion Papers.
  3. Nicholas Economides, 1997. "The Economics of Networks," Industrial Organization 9701002, EconWPA.
  4. Waldman, Michael, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 273-83, February.
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  6. Farrell, Joseph & Katz, Michael, 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Competition Policy Center, Working Paper Series qt1441h2tj, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  7. Jean-Charles Rochet & Jean Tirole, 2003. "Platform Competition in Two-Sided Markets," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 990-1029, 06.
  8. Arun Sundararajan, 2004. "Local Network Effects and Network Structure," Industrial Organization 0412011, EconWPA.
  9. Sanjeev Goyal, 2007. "Introduction to Connections: An Introduction to the Economics of Networks
    [Connections: An Introduction to the Economics of Networks]
    ," Introductory Chapters, Princeton University Press.
  10. Attila Ambrus & Rossella Argenziano, 2009. "Asymmetric Networks in Two-Sided Markets," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 17-52, February.
  11. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
  12. Matutes, Carmen & Regibeau, Pierre, 1992. "Compatibility and Bundling of Complementary Goods in a Duopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 37-54, March.
  13. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  14. Choi, Jay Pil, 1994. "Network Externality, Compatibility Choice, and Planned Obsolescence," Journal of Industrial Economics, Wiley Blackwell, vol. 42(2), pages 167-82, June.
  15. Jullien, Bruno, 2008. "Price Skewness and Competition in Multi-Sided Markets," IDEI Working Papers 504, Institut d'Économie Industrielle (IDEI), Toulouse.
  16. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 105-23, March.
  17. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
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