Business Intelligence

General Network Effects And Welfare

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Executive Summary

(In)direct network effects arise frequently in economic models but, for reasons of analytical tractability, are often assumed to be linear. Here, the authors examine the general non-linear case with two platforms. They establish the conditions characterising equilibria and show that welfare changes can be related in a simple, intuitive way to the degree of diminishing returns of the network effects function. They have examined the case of two competing platforms/networks when heterogeneity and network effects have a very general form. The welfare effects of a change in network sizes, and hence of variables such as prices, depend crucially on the degree of diminishing returns in the (in)direct network effects function.

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