On Price Elasticities in the Presence of Network Effects

Abstract

Price elasticities characterize the effect of price changes on demands in a multi-product context. We demonstrate and explain two perverse properties concerning price elasticities in the presence of network effects when three or more substitutable products are involved: Cross-price elasticities are not necessarily positive, and own-price elasticities are not necessarily negative. These findings imply that the consequences of firms' price moves in a competitive market when network effects are in play deserve further scrutiny.