Profit maximization and social optimum with network externality

Uriel Spiegel, Uri Ben-Zion, Tchai Tavor

Research output: Contribution to journalReview articlepeer-review

3 Scopus citations

Abstract

The paper analyzes the options open to monopoly firms that sell Internet services. We consider two groups of customers that are different in their reservation prices. The monopoly uses price discrimination between customers by producing two versions of the product at positive price for high-quality product and a free version at zero price for lower-quality product. The monopoly can sell advertising space to increase its revenue but risks losing customers who are annoyed by advertising. Network externalities increase the incentive to increase output; thus we find cases where the profit maximization is consistent with maximum social welfare.

Original languageEnglish
Pages (from-to)138-155
Number of pages18
JournalManchester School
Volume74
Issue number2
DOIs
StatePublished - 1 Mar 2006

ASJC Scopus subject areas

  • Economics and Econometrics

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