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Econ104_network_externalities

Econ104_network_externalities - Network Externalities and...

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Network Externalities and Brand Preferences (Ch. 2.2) Network externalities mostly arise at the level of the operating system. Think of the Apple Macintosh vs. PC Windows comparison. Sources of network externalities for these systems: File exchange Moving between computers Learning from other users on the same system Preference for each brand is increasing in the number of its users.
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Duopoly selling to consumers with different preferences Assumptions: 2 firms, firm A and firm B. Both have market power. The 2 firms sell different brands, brand A and brand B. Marginal costs of production are zero (true for both firms). Consumer heterogeneity is in brand preference. The total number of consumers is 2η. Of those, η prefer brand A (type A consumers) and η prefer brand B (type B consumers). All consumers are assumed to have the same preference for compatibility.
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Utility functions Consumers of type A have the following utility function: Consumers of type B have the following utility function: - - + - + - - - = A with compatible is B and buy B, ) ( B with compatible is A and A, buy ) ( le incompatib is B and buy B, le incompatib is A and A, buy δ α α δ α α B B A A B A B B A A A p q q p q q p q p q U - - + - + - - - = B with compatible is A and A, buy ) ( A with compatible is B and buy B, ) ( le incompatib is A and A, buy le incompatib is B and buy B, δ α α δ α α A B A B B A A A B B B p q q p q q p q p q U
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