EFMD EQUIS CREDITED Industrial Organization Lecture 9 Network externalities s& 2-sided markets 學火旦 于 udan university
Binglin Gong Fudan University Industrial Organization Lecture 9 Network Externalities & 2-sided Markets
Introduction Some products are popular with individual consumers precisely because each consumer places a value on others usin ng the same good a telephone is only valuable if others have one too Each user of Microsoft Windows benefits from having lots of other windows users Users can run applications, e.g., Word on each other's computers More applications are written for systems with many users Network effects or network externalities reflect such situations in which each consumer's willingness to pay for a product rises as more consumers buy it
1 Introduction • Some products are popular with individual consumers precisely because each consumer places a value on others using the same good – A telephone is only valuable if others have one, too – Each user of Microsoft Windows benefits from having lots of other Windows users • Users can run applications, e.g., Word on each other’s computers • More applications are written for systems with many users • Network Effects or network externalities reflect such situations in which each consumer’s willingness to pay for a product rises as more consumers buy it
Network externalities Market structure is also affected by the presence of network externalities Strategic interaction in a market with network effects is complicated These markets are likely to contain a small number of firms even if there are limited economies of scale and scope
2 Network Externalities • Market structure is also affected by the presence of network externalities • Strategic interaction in a market with network effects is complicated • These markets are likely to contain a small number of firms – even if there are limited economies of scale and scope
Monopoly provision of a network Service An early model by rohlfs (1974)illustrates many of the issues that surround markets with network effects Imagine some service, say a cable network, where consumers hook up to the system but the cost of providing them service after that is effectively zero Provider is a monopolist charging a"hook up?"fee but no other payment The basic valuation of the product v, is uniformly distributed across consumers from 0 to $100. Consumer willingness to pay is fv, where f is the fraction of the consumer population that is served · TThe ith’ s consumer, s demand is 0 if fv, <p qi= 1if/v1≥P
3 Monopoly Provision of a Network Service • An early model by Rohlfs (1974) illustrates many of the issues that surround markets with network effects – Imagine some service, say a cable network, where consumers “hook” up to the system but the cost of providing them service after that is effectively zero • Provider is a monopolist charging a “hook up” fee but no other payment • The basic valuation of the product vi is uniformly distributed across consumers from 0 to $100. Consumer willingness to pay is fvi where f is the fraction of the consumer population that is served • The ith’s consumer’s demand is: 0 if fvi < p 1 if fvi p qi D =
Monopoly provision of a network 2 Consider the marginal consumer with basic valuation v=pf The firm will serve all consumers with valuations> v Solving for the fraction fof the market served we have f=1-v/100=1-p/100f So, the inverse demand function is: p=100f(1-t)
4 Monopoly Provision of a Network 2 • Consider the marginal consumer with basic valuation v pf ~ • The firm will serve all consumers with valuations v ~ • Solving for the fraction f of the market served we have: f = 1 - /100 ~ v = 1 – p/100f • So, the inverse demand function is: p = 100f(1 – f)