The Economics of Networks: The "Macro" Approach The Economics of Networks

3.2 The "Macro" Approach

There are two approaches and two strands of literature in the analysis of network externalities. The first approach assumes that network externalities exist, and attempts to model their consequences. I call this the "macro" approach. Conceptually this approach is easier, and it has produced strong results. It was the predominant approach during the 80s. The second approach attempts to find the root cause of the network externalities. I call this the "micro" approach. In Industrial Organization, it started with the analysis of mix-and-match models and has evolved to the analysis of various structures of vertically related markets. In Finance, it started with the analysis of price dispersion models. The "micro" approach is harder, and in many ways more constrained, as it has to rely on the underlying microstructure. However, the "micro" approach has a very significant benefit in defining the market structure. We discuss the "macro" approach first.

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