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Price discrimination with network effects: different welfare results from identical demand functions

Author

Listed:
  • Ryo Hashizume

    (Faculty of Economics, Daito Bunka University)

  • Takeshi Ikeda

    (Faculty of Economics, Daito Bunka University)

  • Tatsuhiko Nariu

    (Graduate School of Business, Doshisha University)

Abstract

We show that the welfare effects of third-degree price discrimination depend on what kind of network effects are present—between-markets or within-market. Different combinations of parameters that determine the strength of network effects between-markets and within-market induce the same demand functions; however, measured consumer surplus and social welfare based on the demand functions vary across these parameters. This result indicates that welfare analysis of markets with network effects must be based on consumer utility functions that parameterize the network effects, and not on demand functions that, although sufficient to describe monopoly price-setting, mask the impact of network effects on consumer welfare.

Suggested Citation

  • Ryo Hashizume & Takeshi Ikeda & Tatsuhiko Nariu, 2021. "Price discrimination with network effects: different welfare results from identical demand functions," Economics Bulletin, AccessEcon, vol. 41(3), pages 1807-1812.
    • Handle: RePEc:ebl:ecbull:eb-21-00216
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    References listed on IDEAS

    as
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    7. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
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    Cited by:

    1. Takanori ADACHI, 2022. "Recent Advances in the Theory of Third-Degree Price Discrimination: A Brief Survey," Discussion papers e-22-006, Graduate School of Economics , Kyoto University.

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    More about this item

    Keywords

    Monopoly; Network effects; Third-degree price discrimination;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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