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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.
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Figure 6.2: Inframarginal network externalities
6.2 General competition policy and network externalities
The implementation of policy measures geared to internalizing external effects, for
example the implementation of a Pigouvian tax, was traditionally considered a viable means of restoring efficient production in the presence of external effects.75 As is
shown in Figure 6.1, internalizing Pareto-relevant network externalities requires that
consumers gather on one uniform technology platform as long as the marginal social
benefit from further network participation continues to be positive. However, when
consumers derive utility not only from network size but also from product characteristics (the technology effect), internalizing network externalities in this way may
not correspond to the social welfare maximizing solution. When consumers’ tastes
for product characteristics differ, there may be a conflict between internalizing network externalities and catering to individual preferences. Consumers with heterogeneous tastes will not be able to agree on a single preferred set of product characteri-
75 See Baumol and Oates (1988) for an overview of the policy instruments which are applied so
as to internalize external effects in the context of environmental management.
p
S
MC
MSB
MBtotal
MPB
SpS*
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References
Zusammenfassung
Die Konvergenz der Netztechnologien, die dem Internet, der Telekommunikation und dem Kabelfernsehen zu Grunde liegen, wird die Regulierung dieser Märkte grundlegend verändern. In den sogenannten Next Generation Networks werden auch Sprache und Fernsehinhalte über die IP-Technologie des Internets transportiert. Mit den Methoden der angewandten Mikroökonomie untersucht die vorliegende Arbeit, ob eine ex-ante sektorspezifische Regulierung auf den Märkten für Internetdienste wettbewerbsökonomisch begründet ist. Im Mittelpunkt der Analyse stehen die Größen- und Verbundvorteile, die beim Aufbau von Netzinfrastrukturen entstehen, sowie die Netzexternalitäten, die im Internet eine bedeutende Rolle spielen. Die Autorin kommt zu dem Ergebnis, dass in den Kernmärkten der Internet Service Provider keine monopolistischen Engpassbereiche vorliegen, welche eine sektor-spezifische Regulierung notwendig machen würden. Der funktionsfähige Wettbewerb zwischen den ISP setzt jedoch regulierten, diskriminierungsfreien Zugang zu den verbleibenden monopolistischen Engpassbereichen im vorgelagerten Markt für lokale Netzinfrastruktur voraus. Die Untersuchung zeigt den notwendigen Regulierungsumfang in der Internet-Peripherie auf und vergleicht diesen mit der aktuellen Regulierungspraxis auf den Telekommunikationsmärkten in den Vereinigten Staaten und in Europa. Sie richtet sich sowohl an die Praxis (Netzbetreiber, Regulierer und Kartellämter) als auch an die Wissenschaft.