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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Zulehner, Christine / Schirle, Tammy

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System Components, Network Effects, and Bundling

Matthew T. Clements1

1University of British Columbia,

Citation Information: Topics in Economic Analysis & Policy. Volume 2, Issue 1, ISSN (Online) 1538-0653, DOI: 10.2202/1538-0653.1046, July 2002

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I investigate the competition between suppliers of components of a system for which there are network effects among users. Bundling one of these components with an outside good reduces the cost to consumers of using the system. This cost reduction is not necessarily welfare-enhancing, and bundling can also reduce welfare by decreasing innovation incentives. The model is used to evaluate Microsoft's bundling of Windows with Internet Explorer and its effect on competition with Netscape.

Keywords: network effects; bundling

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