Network externalities and the Coase conjecture

This paper addresses two general questions. First, what is the effect of ma rket structure on the development of a network in a dynamic model with rati onal expectations? Secondly, is the intuition that network externalities ar e 'economies of scale on the demand side' correct? These questions are exam ined in a model of durable good production in the presence of network exter nalities. Two results are presented. First, the Cease conjecture fails in i ts strongest sense when network benefits are increasing in the current netw ork size. Secondly, a committed monopolist may be socially preferable to a time consistent producer when network externalities are sufficiently large. The analysis indicates an analogy between network externalities and learni ng-by-doing. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classi fication: C73; C78; D42; L12.