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Complementary Network Externalities and Technological Adoption

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  • Church, Jeffrey
  • Gandal, Neil

Abstract

We address the adoption of technology when there are network externalities and networks are characterized by complementary products produced by different firms. We show that the market outcome is efficient if the software firms are monopolistic competitors. If the software firms are Bertrand competitors, a hardware technology with lower software development costs is adopted for many parameter values for which it is socially optimal to adopt the other technology. The overadoption is due to a discrepancy between the private and social value of having a larger network: this divergence is increasing in the software development costs. We also examine various contractual arrangements between hardware firms and software firms which internalize the network externality.

Suggested Citation

  • Church, Jeffrey & Gandal, Neil, 1991. "Complementary Network Externalities and Technological Adoption," Foerder Institute for Economic Research Working Papers 275508, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275508
    DOI: 10.22004/ag.econ.275508
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    References listed on IDEAS

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    1. Joseph Farrell & Nancy T. Gallini, 1988. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(4), pages 673-694.
    2. 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.
    3. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
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