Network Effects with Horizontal Product Differentiation: a Case of Thai Mobile Telecommunications Market

Abstract

Network Effects arise when the benefit of some goods is increasing with the number of consumers. The consumer demand also depends on the number of consumers in the market. This research aims to assess network effects in a market with horizontal product differentiation by Salop’s Circular City Model. In the short-run equilibrium, the strong network effects may reduce competition in some cases. In the long-run equilibrium, there is a relation between the number of consumers and various market structures such as the number of producers and prices. The results of the study indicate that an increase in network benefit leads to a decrease in the numbers of producers and prices. However, an increase in the number of consumers or a decrease in fixed cost results in an increase in the number of producers. In addition, market competition raises the number of operators and prices compared to the maximum social welfare case. Moreover, the empirical study shows that an additional operator requires additionally 5% of current subscribers but it has negligible impacts on the average revenue per user, which relates to service tariff.