Screening Contracts in the Presence of Positive Network Effects

Abstract

Based on the critical assumption of strategic complementarity, this paper builds a general model to describe and solve the screening problem faced by the monopolist seller of a network good. By applying monotone comparative static tools, we demonstrate that the joint presence of asymmetric information and positive network effects leads to a strict downward distortion for all consumers in the quantities provided. We also show that the equilibrium allocation is an increasing function of the intensity of network effects, and that a discriminating monopoly may supply large quantities for all consumers than a competitive industry.network effects, strategic complementarities, contracting with externalities, second-degree discrimination, monotone comparative statics