Network Externalities and the Coase Conjecture

This paper addresses two general questions. First, what is the eeect of market structure on the development of a network in a dynamic model with rational expectations? Secondly, is the intuition that network externalities arèeco-nomies of scale on the demand side' correct? These questions are examined in a model of durable goodproduction in the presence of network externalities. Two results are presented. First, the Coase conjecture fails in its strongest sense when network beneets are increasing in the current network size. Secondly, a committed monopolist may besocially preferable to a time consistent producer when network externalities are suuciently large. The analysis indicates an analogy between network externalities and learning-by-doing. Filename: COASENT8.tex. I w ould like to thank Larry Karp for many comments on various drafts which h a v e improved the paper substantially. Discussions with David Newbery and David Myatt have also been very helpful. Any errors are my o wn. Funding from Alcatel Bell is gratefully acknowledged. The latest draft of this paper can be found at