SFeDu
of.211, Gorgoko St., 88 
Rostov-on-Don
Russia
344002
+7 (863) 250-59-54
This email address is being protected from spambots. You need JavaScript enabled to view it.
te@sfedu.ru

TERRA ECONOMICUS

RECIPROCITY IN EMERGING MARKETS FOR NETWORK GOODS

TERRA ECONOMICUS, , Vol. 17 (no. 4),

The paper discusses economic efficiency of mutual aid between competitors in markets for network goods while attaining the critical mass of consumers. Another aspect of reciprocity analyzed in the paper is the supply of free light versions of a good in order to gain loyalty of customers and attract their interest in more advanced versions. Two types of vertical differentiation of network goods are examined: the real one based on the amount of options offered to consumers, and the phantom one – the artificial division of goods into the upmarket category and the normal one. The research method is mathematical modeling. Various formulas are used to describe links between the consumer value of a good and the number of its consumers; between the demanded quantity of a good and its price level; between the distribution of total quantity demanded among competitors and their prices/price elasticity of demand; between the velocity of achieving maximum economic benefit and prices as well as marketing strategies of suppliers. Computer experiments have been used to analyze the role of reciprocity between competitors in achieving such goals as: maximization of net present value of network goods suppliers, minimization of discounted payback period and minimization of period needed to achieve the maximum net present value. The last two goals are essential when new competitors are likely to enter the market. The authors of the paper evaluate the importance of such tools as versioning (supply of light and advanced versions of a good), cooperative strategy of moderately high prices as well as cooperative phantom differentiation when the risk of appearance of new competitors is high.
Citation: Dementiev, V. E., Evsukov, S. G., Ustyuzhanina, E. V. (2019). Reciprocity in emerging markets for network goods. Terra Economicus, 17(4), 23–40. DOI: 10.23683/20736606-2019-17-4-23-40


The article was prepared with the financial support of RFBR (project 17-06-00080) «The comparative analysis of pricing strategies at the network markets based on the economic and mathematical modelling».

Keywords: reciprocity; network goods; pricing; duopoly; differentiation of goods; versioning; pricing strategy

References:
  • Arthur, W. (1989). Competing technologies, increasing returns, and lock-in by historical events. Economic Journal, 99(394), 16–131.
  • Bensaid, B., Lesne, J.-P. (1996). Dynamic monopoly pricing with network externalities. International Journal of Industrial Organization, 14(6), 837–855.
  • Besen, S. M., Farrell, J. (1994). Choosing how to compete: Strategies and tactics in standardization. Journal of economic perspectives, 8(2), 117–131.
  • Botsman, R., Rogers, R. (2010). What’s Mine Is Yours: The Rise of Collaborative Consumption. HarperBusiness.
  • Brynjolfsson, E., Kemerer, C. F. (1996). Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market. Management Science, 42(12), 1627–1647.
  • Cabral, L. (2011). Dynamic Price Competition with Network Effects. Review of Economic Studies, 78(1), 83–111.
  • Cabral, L., Salant, D., Woroch, G. (1999). Monopoly pricing with network externalities. International Journal of Industrial Organization, 17(2), 199–214.
  • Chellappa, R. K., Mehra, A. (2017). Cost Drivers of Versioning: Pricing and Product Line Strategies for Information Goods. Management Science, 64(5), 2164–2180.
  • Dementiev, V. E., Evsukov, S. G., Ustyuzhanina, E. V. (2018). A pricing model in the market for network goods in terms of duopolistic competition. Economics and mathematical methods, 54(1), 26–42. (In Russian.)
  • Economides, N. (1996). The economics of networks. International Journal of Industrial Organization, 14(2), 673–699.
  • Economides, N., Mitchell, M., Skrzypacz, A. (2004). Dynamic Oligopoly with Network Effects (http://www.stern.nyu.edu/networks/Dynamic_Duopoly_with_Network_Effects.pdf – Accessed on September 5, 2018).
  • Elmaghraby, W., Keskinocak, P. (2003). Dynamic pricing: Research overview, current practices and future directions. Management Science, 49(10), 1287–1309.
  • Evsukov, S. G., Sigarev, A. S., Ustyuzhanina, E. V. (2016). Model of dynamic pricing of network goods in a monopoly provider. Financial Analytics: problems and solutions, 9(30), 2–18. (In Russian.)
  • Farrell, J., Saloner, G. (1985). Standardization, Compatibility, and Innovation. Rand Journal of Economics, 16(1), 70–83.
  • Fudenberg, D., Tirole, J. (2000). Customer Poaching and Brand Switching. The RAND Journal of Economics, 31(4), 634–657.
  • Ghose, A., Sundararajan, A. (2005). Software Versioning and Quality Degradation? An Exploratory Study of the Evidence. CEDER Working Paper №. CeDER-05-20 (https://ssrn. com/abstract=786005 – Accessed on September 9, 2019).
  • Haruvy, E., Prasad, A. (2001). Optimal freeware quality in the presence of network externalities: an evolutionary game theoretical approach. Journal of Evolutionary Economics, 11(2), 231–248.
  • Jing, B. (2003). Market Segmentation for Information Goods with Network Externalities. Information Systems Working Papers Series (https://ssrn.com/abstract=1281325 – Accessed on September 9, 2019).
  • Katz, M. L., Shapiro, C. (1985). Network Externalities, Competition, and Compatibility. American Economic Review, 75(3), 424–440.
  • Katz, M. L., Shapiro, C. (1986). Technology Adoption in the Presence of Network Externalities. The Journal of Political Economy, 94(4), 822–841.
  • Komarova, I. P., Novikova, E. S., Ustyuzhanina, E. V. (2017). Economy of reciprocity: the well-forgotten new. Vestnik of the Plekhanov Russian University of economics, 5(95), 3–11. (In Russian.)
  • Liu, C., Kemerer, C., Slaughter, S., Smith, M. (2012). Standards competition in the presence of digital conversion technology: an empirical analysis of the flash memory card market. MIS Quarterly, 36(3), 921–942.
  • Nault, B. R., We, X. (2005). Product Differentiation and Market Segmentation of Information Goods (https://ssrn.com/abstract=909604 – Accessed on October 5, 2019).
  • Oren, S., Smith, S. A. (1981). Critical Mass and Tariff Structure in Electronic Communications Markets. Bell Journal of Economics, 72(2), 467–86.
  • Polanyi, K. (2002). Economics as Institutionally Formed Process. Journal of Economic Sociology, 2(2), 62–73. (In Russian.)
  • Proserpio, D., Xu, W., Zervas, G. (2018). You Get What You Give: Theory and Evidence of Reciprocity in the Sharing Economy (https://ssrn.com/abstract=3203144 – Accessed on August 25, 2019).
  • Rottner, R. M., Eberhart, R. (2018). Reciprocal Community Benefits: Community Engagement, Employment, and New Firm Outcomes (https://ssrn.com/abstract=3246455).
  • Rozanova, N. M., Bulichenko, D. A. (2011). Competition in the telecommunication industry: network market under conditions of product differentiation. Terra Economicus, 9(1), 17–32. (In Russian.)
  • Shapiro, C., Varian, H. R. (2013). Information Rules: A Strategic Guide to the Network Economy. Brighton: Harvard Business Review Press.
  • Strelets, I. A. (2017). Multiplier Effects in Networks. Animated effects in networks. World Economy and International Relations, 61(6), 77–83. (In Russian.)
Publisher: Southern Federal University
Founder: Southern Federal University
ISSN: 2073-6606