Essays on Network Effects

Many industries characterize the "network externalities" or "network effects," which highlight that the benefit that a consumer derives from the use of a good often depends on the number of other consumers purchasing compatible items. The four essays in this dissertation examine some important issues in industries in the presence of network effects. In the first essay, the influence of network effects on pricing strategies under a monopoly scheme is investigated as a starting point. The model is then extended to a dynamic setting and the monopolist's timing for introducing an upgrade in the software industry is studied. In the second essay, a game-theoretic setting is used to determine if upgrades and the presence of network effects offer the monopolist commitment strategies that can be used to moderate the downward pressure on prices, i.e., modify the adverse conclusions or the Coase conjecture. iv The question whether or not government should intervene in network markets is still debatable, especially when government involvement increases. The incentives of government to improve market outcomes are challenged by many researchers of political economy. The third essay considers the case for government intervention in network markets. The model developed in this essay attempts to predict the outcome of standard setting by government intervention under the assumption that the government agent maximizes political welfare rather than social welfare. The last essay extends Katz and Carl Shapiro's model to international markets. This essay considers the private incentives of an import-competing firm and the social incentives of a technology-importing country to achieve compatibility for a product characterized by network effects. The model found that the social incentive of an importing country to deviate from the international standard is even greater than the private incentives, providing, in turn, incentives to adopt and enforce technical barriers to trade. These results confirm the problems of path dependence and may offer some insights for the international standard-setting process. (132 pages) v Dedicated to my mother, in memory of my father, and to my family for their support. vi ACKNOWLEDGMENTS I am deeply indebted to my major advisor, Dr. T. F. Glover, for his delicate guidance and financial support since the second year of my study here. With a sense of humor and serious thinking, he teaches me lots not only in economic research but also in many other things. His encouragement is the major reason that I can finish my degree. I am …