1. INTRODUCTION 

7-001      This unit focuses on demand-side network effects, or as they are sometimes called, demand-side economies of scale.

7-002      Network effects, and the related concept of two (or multi) -sided markets, are playing an increasing role in competition law in the communications sector, computer hardware and software, Computer Ticketing Services (CRS), Automated Teller Machines (ATMs) and credit card schemes sectors to name a few; and also in the evaluation of mergers, industry standards, market structure and competitive behaviour.

7-003      In this unit, the concept and application of network effects are examined in relation to competition law – Article 82 (abuse of a dominant position), Article 81 (agreement or understandings which prevent, or distort competition) – and the merger/joint venture regulation.

7-004      Chapter 2 begins by defining network effects and the way they alter the economics of market structure, competitive behaviour and pricing.  The theory is then applied to concerns over the adoption of industry and product standards, mergers in the communications sector, and the pricing of mobile services.

7-005      Chapter 3 deals with two-sided markets.  This covers situations where network effects affect consumers in different groups or sides of the market brought together by a third party, such as credit card schemes.  The theory of two-sided markets is developed and then applied to some features of credit card schemes which have been the subject of recent competition investigations.

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