Network Effects, Trade And Welfare

During the last twenty years, there has been remarkable renovation in the trade theory area. Traditional trade theory looks on all international trades as wheat-mode trade. While Neo-trade theorists believe that some of the trades are airplane-mode trade. Even though airplane-mode trade is affected by wheat-mode trade, the traditional trade theory founded on wheat-mode trade is not absolutely comprehensive. The thought of increasing returns is indispensable in interpreting airplane-mode trade. At the same time, world economy experiences great changes. The information communication based New Economy has attracted economists' attention. The study bearing relation on New Economy has found that network effects exists in most of the major New Economy industries and network effects is an important source of increasing returns. Increasing returns from network effects are different from those emphasized by new theory of international trade. Network effects indicate the fact that others' selection can affected one's utility. The thoughts are based on demand-side of markets, while neo-trade theorists don't pay attention to it. Along with software-mode trade becoming more and more important in international trade, it is sure that it is not enough to analyze software-mode trade and its influence on economy using only thoughts of wheat-mode trade and airplane-mode trade. Introducing network effects into trade theory not only has great value in science field, but also can be used to direct activities in real world.Problems concerning network effects have been widely discussed by many economists. Katz & Shapiro, Gilbert, Besen investigated in fields of complimentarily, compatibility and standard. Arthur and Witt pointed out that being locked-in is possible for users have to pay a premium for their transfer between networks. Hayashi, Samuelson & Varian have specially described welfare and government intervention in their literatures. Gandal & Shy analyzed policies of standardization by government under certain hypothesis when network effects are evident.This paper analyzes the influence of network effects on welfare when trade happens. We find that when network effects can be transferred between markets, even in two similar countries where the production presents constant returns, trades may happen for there is enlarged market induced by network effects. When network effects can't be transferred between markets, no matter the two kinds of products are compatible or not, competition in network can enhance welfare. In latter case, a certain price exists to acquire absolute dominance. This paper is divided into seven sections. Section one is introduction. In section two, after presenting relative conceptions, we point out that local positive feedback and multi-equilibria in the markets of networked goods may exist. We discuss monopolist's profits, consumers' surplus and country's welfare in section three. Rohlfs' utility function is used there, and the situation when new enterprise enters into the market is discussed at the end of this section. Section four discusses the case when network effects are transferable between markets, the influence of trade on profit, surplus and welfare.'Section fivediscusses the case when network effects couldn't transfer between markets. Under this hypothesis, we distinguish two situations, that is, the two kinds of products are compatible and incompatible. In case of compatible, opening market bilaterally can help to advance one's welfare, but opening market unilaterally will decrease one's welfare. If case of incompatible, if the utility coefficients are the same, there exists a price which can let the incumbent maintain its monopolization, and the welfare will be increased at the same time. Section six analyzes a case about the competition between WPS Office and MS Office in Chinese market. The last section concludes.There are several innovations in this paper. First, we introduce the notion of network effects into the field of trade and welfare. Few correlative literatures exist using thi...