93 6.1.3 Pecuniary network externalities A further distinction made in the literature on externalities is the one between pecuniary network externalities and technological network externalities (Liebowitz and Margolis, 1994: 137). As will be shown below, pecuniary network externalities are demand effects that are transmitted through the price system, whereas technological network externalities impose benefits (or costs) outside of market mechanisms. Since pecuniary externalities are common in network industries, they will be considered in more detail. Pecuniary network externalities can result from an outward shift in demand in a decreasing costs industry. When the demand shift allows the producer to reach a lower level of production costs both new consumers and existing consumers benefit from a lower price level. Formally the utility increase to existing consumers could, of course, also be illustrated by the utility function Ui,j(S,T) that was introduced at the beginning of this chapter. However, the difference to “real” external effects is that in the case of pecuniary externalities the utility increase is only indirectly related to the number of network participants. The direct relationship is between the fall in prices, induced by increased participation, and the resulting increase in consumers’ surplus. Existing consumers appropriate the increase in consumer rents as a result of a functioning price system. So, in fact, with pecuniary externalities there is no external social benefit when an additional user joins the network. In a policy context it is important to distinguish the two effects. Pecuniary externalities should not attract policy intervention because they are a part of a functioning price mechanism. Technological externalities may, however, justify policy directed at internalizing the externality. 6.1.4 Pareto-relevance of network externalities Not all correctly identified technological network externalities result in too little network participation. External effects can be inframarginal, in the sense that they would not change the equilibrium outcome, even if they were internalized into the market mechanism (Liebowitz and Margolis, 1994: 140). Inframarginal externalities are realistic when a network community profits from increasing membership only up to a critical size, but further growth beyond that point would yield no further benefit. When the critical size of the network is small relative to the number of potential members, several networks can coexist and compete for membership. Figure 6.2 is a graphic illustration of inframarginal network externalities in a static environment. The marginal social benefit from further network participation is zero once network size has reached S*. Because the private equilibrium Sp, where marginal private benefits equal marginal private costs, is to the right of S*, the socially optimal equilibrium coincides with the private equilibrium.