3 - An Economic Primer on Network Goods

Summary

In this chapter, we seek to understand key economic consequences of network effects. First, in Section 3.1, we analyze the impacts that network effects have on the demand for participation on a platform. The main lesson we draw is that the interdependence between individual demands leads to unconventional aggregate demands; in particular, we show that a given price for accessing the platform may be compatible with several levels of participation. Next, in Section 3.2, we explore the pricing of access to a platform, which is made complex by the presence of network effects. Finally, in Section 3.3, we discuss other strategic decisions that platforms need to combine with pricing to manage network effects; in particular, a platform has to decide the extent to which its services are compatible with alternative services.