Working Paper: NBER ID: w2182
Authors: Kala Krishna
Abstract: This paper analyzes the role of network externalities and expectations about them in the formulation of trade policy. Their effects are studied in duopoly situations when products are compatible and when they are incompatible and when multimarket effects are possible. Network externalities and expectations regarding the size of the network affect optimal trade policy in three ways. First, the presence of expectations effects creates a role for 'policy if. there are differences between the way the externalities operate and expectations about how they operate. Second, when goods are compatible, the existence of network externalities can cake goods complementary which reverses the direction of optimal policy. .Third, since multimarket effects occur naturally with network externalities and compatible products, purely domestic policies, which are legal under GATT, can have international profit shifting effects which may be in the national 'interest.
Keywords: network externalities; trade policy; high tech industries; duopoly; GATT
JEL Codes: F13; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Expectations about network size (D85) | Demand for high-tech products (L63) |
| Demand for high-tech products (L63) | Optimal trade policies (F13) |
| Expectations about network size (D85) | Optimal trade policies (F13) |
| Incorrect beliefs about output impact on network size (D85) | Suboptimal production decisions (D21) |
| Government subsidies (H23) | Correcting misperception about network size (D85) |
| Network externalities (D62) | Complementary goods (D10) |
| Complementary goods (D10) | Reversal of optimal policy direction from subsidies to taxes (H23) |
| Domestic policies (H59) | Unintended international effects (F69) |
| Government subsidies (H23) | Domestic production (D20) |
| Domestic production (D20) | Expected network size (D85) |