Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Tuesday, April 27, 2010

Competition with Local Network Externalities

Posted by D. Daniel Sokol

Øystein Fjeldstad, Norwegian School of Management, Espen R. Moen, Norwegian School of Management, and Christian Riis, Norwegian School of Management have a new paper on Competition with Local Network Externalities.

ABSTRACT: Local network externalities are present when the utility of buying from a firm not only depends on the number of other customers (global network externalities), but also on their identity and/or characteristics. We explore the consequences of local network externalities within a framework where two firms compete offering differentiated products. We first show that local network externalities, in contrast to global network externalities, don't necessarily sharpen competition. Then we show that the equilibrium allocation is inefficient, in the sense that the allocation of consumers on firms does not maximize social surplus. Finally we show that local network externalities create a difference between the marginal and the average consumer, which gives rise to inefficiently high usage prices and too high level of compatibility between the networks.

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