The Economics of Networks. 1. Introduction. Network industries play a crucial role in modern life. Transportation, communication, information, railroad networks… Economics of networks industries with vertical relations. 2. Classification of Networks.
Example: AB and BA
Figure 3, SA local customer in city A;
SB local customer in city B.
Local phone calls;
long distance phone calls.
A pair of vertically-related industries is equivalent to a one-way network.
3.1 Sources of Network Externalities
complementarity (direct or indirect) bw the components of a network
Financial exchange network: indirect externalities
--assumes network externalities exists, and attempts to model their consequences.
3.2.1 Perfect Competition
Perfect price discrimination.
---the second and third criteria in both cases create incentives that are in conflict.
If costs are different…firms play a standard coordination game
tech are known
coordination is costless
price discrimination is not allowed
no asymmetries created
--might be conflict across firms
---compatibility vs. incompatibility &decision of partial incompatibility.
--incentive depends on the cross substitution bw own-products and hybrids. (if substitution equal, earlier results hold.)
4.1 Invitations to Enter
joint determination of an equilibrium market structure together with the degree of compatibility across firms.
extent of standardization in markets with more than two participants; the structure of “standards” coalitions
markets for adapters and add-ons.
market structure in multi-period dynamic games with network externalities.
predation and foreclosure in networks