The Economics of Networks: Monopoly The Economics of Networks

3.2.2 Monopoly

Economides and Himmelberg (1995) show that a monopolist who is unable to price- discriminate will support a smaller network and charge higher prices than perfectly competitive firms. This is despite the fact that the monopolist has influence over the expectations of the consumers, and he recognizes this influence, while no perfectly competitive firm has such influence.16 Influence over expectations drives the monopolist to higher production, but the monopolist's profit-maximizing tendency towards restricted production is stronger and leads it to lower production levels than perfect competition. Thus, consumers and total surplus will be lower in monopoly than in perfect competition. Therefore the existence of network externalities does not reverse the standard welfare comparison between monopoly and competition; it follows that the existence of network externalities cannot be claimed as a reason in favor of a monopoly market structure.

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