Wednesday, February 2, 2011

Prices and Deadweight Loss in Multi-Product Monopoly

Posted by D. Daniel Sokol

Rabah Amir (University of Arizona and University of Luxembourg), Jim Y. Jin (University of St Andrews),
Gerald Pech (American University in Bulgaria), and Michael Tröge (ESCP-Europe) address Prices and Deadweight Loss in Multi-Product Monopoly.

ABSTRACT: This paper provides a thorough analysis of oligopolistic markets with positive demand-side network externalities and perfect compatibility. The minimal structure imposed on the model primitives is such that industry output increases in a firm's rivals' total output as well as in the expected network size. This leads to a generalized equilibrium existence treatment that includes guarantees for a nontrivial equilibrium, and some insight into possible multiplicity of equilibria. We formalize the concept of industry viability and show that it is always enhanced by having more firms in the market and/or by technological improvements. We also characterize the e¤ects of market structure on industry performance, with an emphasis on departures from standard markets. The approach relies on lattice-theoretic methods, which allow for a unified treatment of various general results in the literature on network goods. Several illustra! tive examples with closed-form solutions are also provided.

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