NETWORK EXTERNALITIES, TECHNOLOGICAL-PROGRESS, AND THE COMPETITION OFMARKET CONTRACTS

Network externalities are used to describe the fact that many modem pr oducts become more valuable the more users adopt products of the same technology. Where network externalities and technological progress exi st, the various kinds of inefficiencies discussed in the recent litera ture can be explained by different types of contracts. The main catego ries analysed are simple market contracts, update contracts, and servi ce contracts. It is shown that these types of contract emerge endogeno usly from the incentive structure of profit-maximizing firms. Competit ion between these contracts may substantially reduce inefficient alloc ations caused by network externalities.