Skip navigation
Title: 

Pricing of Complements and Network Effects

Authors: Economides, Nicholas - NYU Stern School of Business
Viard, V. Brian - Cheung Kong Graduate School of Business
Keywords: calibration; monopoly; network effects; complementary goods; software; Microsoft
Issue Date: 2005
Series/Report no.: NET Institute Working Paper;05-31
Abstract: We discuss the case of a monopolist of a base good in the presence of a complementary good provided either by it or by another firm. We assess and calibrate the extent of the influence on the profits from the base good that is created by the existence of the complementary good. We establish an equivalence between a model of a base and a complementary good and a reduced-form model of the base good in which network effects are assumed in the consumers' utility functions as a surrogate for the presence of direct or indirect network effects, such as complementary goods produced by other firms. We also assess and calibrate the influence on profits of the intensity of network effects and quality improvements in both goods. We evaluate the incentive that a monopolist of the base good has to improve its quality rather than that of the complementary good under different market structures. Finally, based on our results, we discuss a possible explanation of the fact that Microsoft Office has a significantly higher price than Microsoft Windows although both products have comparable market shares.
URI: http://hdl.handle.net/2451/28442
Appears in Collections:NET Institute Working Papers Series

Files in This Item:
File Description SizeFormat 
Economides_Viard_05-31.pdf245.17 kBAdobe PDFView/Open


Items in FDA are protected by copyright, with all rights reserved, unless otherwise indicated.