Network Externality and the Coordination Problem

Abstract

We show that Rohlfs’s (1974) model is a special case of a spatial monopoly model á la Hotelling (1929) with uniform consumer distribution and quadratic transportation costs, where location is exogenous and the good yields no intrinsic utility. By relaxing these assumptions, we prove that the coordination problem typically thought to affect markets for network goods may not arise in general. Endogenizing location makes it easier for the monopolist to extract consumer surplus but also to cover the entire market. We also show that the main conclusions remain qualitatively unmodified if consumer distribution is triangular.