Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition

Part Seven

Networks, Auctions, and Strategic Policy Commitment

In this final part of the text, we explore topics that do not fit easily within our earlier classifications. The first of these is network externalities, which are the topic of Chapter 22. For many goods, such as telephones, the value of the product to any one consumer rises as additional consumers buy it. Such network effects greatly alter both the nature of industry competition and the characteristics of the market outcome. Often, network externalities and the complementarities that underlie them give rise to multiple equilibria with no guarantee that the actual equilibrium chosen will be the best of these. Further, because network externalities act much like scale economies except that they work on the demand side, they create strong incentives for firms to operate on a large scale with the result that the market will inevitably be dominated by those few firms that survive. In turn, because not just some profit but a firm's very survival may be at stake, competition in industries with important network effects can be incredibly fierce. We explore these issues in some detail. We also include a discussion of Gandal's (1994) empirical study that tries to identify network characteristics in the market for computer spreadsheets.

In Chapter 23, we switch gears somewhat and turn to the topic of auctions. It has only been in recent years that auctions have re-emerged as a common market arrangement, especially for government ...