On the simple welfare economics of network externalities

Network externalities are analysed in the telecommunications sector and the public good character of the network is stressed. It is examined whether the presence of network externalities justifies a subscribership subsidy usually reflected in a low connection charge. The answer is, in general, positive unless network externalities are infra‐marginal, a case that exists at high penetration rates. In this case the argument for the achievement of universal service by invoking the presence of network externalities fails. This argument becomes even weaker as the expansion of the network through the provision of new goods and services creates externalities that affect all subscribers equally.