Journal of Economic Perspectives: Vol. 8 No. 2 (Spring 1994)


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Network Externality: An Uncommon Tragedy

Article Citation

Liebowitz, S. J., and Stephen E. Margolis. 1994. "Network Externality: An Uncommon Tragedy." Journal of Economic Perspectives, 8(2): 133-150.

DOI: 10.1257/jep.8.2.133


Economists have defined 'network externality' and have examined putative inframarginal market failures associated with it. This paper distinguishes between network effects and network externalities, where the latter are market failures. The authors argue that while network effects are important, network externalities are theoretically fragile and empirically undocumented. Some network externalities are merely pecuniary. Network ownership or transactions among network participants can internalize some network effects. The type of market failure that has been associated with these externalities is a transition problem that has little to do with externality.

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Liebowitz, S. J. (U TX, Dallas)
Margolis, Stephen E. (NC State U)

JEL Classifications

L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L23: Organization of Production
L13: Oligopoly and Other Imperfect Markets


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