Working Paper: CEPR ID: DP7778
Authors: Ystein Fjeldstad; Espen R. Moen; Christian Riis
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.
Keywords: competition; differentiated products; efficiency; local network externalities
JEL Codes: D43; D62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local network externalities (D85) | competition intensity (L13) |
| local network externalities (D85) | equilibrium allocation (D51) |
| equilibrium allocation (D51) | social surplus (D69) |
| local network externalities (D85) | pricing strategies (D49) |
| pricing strategies (D49) | usage prices (P22) |
| local network externalities (D85) | disparity between marginal and average consumers (D11) |
| disparity between marginal and average consumers (D11) | usage prices (P22) |