TL;DRAbstract
This chapter addresses the economics of certain types of value-added networks (VANs) that are common in the financial sector and are becoming widespread in other sectors. It investigates the effect of different pricing regimes on allocative efficiency, and studies the nature of competition between vendors of these services. It emerges that there is a very strong tendency toward monopoly in VAN industries. VANs appear to be a classic case of natural monopoly, although this is not dependent on increasing returns in their technologies. The main cause is externalities between users, which lead to a “critical mass” phenomenon. A VAN is only economically viable after a certain critical mass of users is achieved. Standard prescriptions for achieving efficiency in such situations, such as marginal cost pricing and interconnection, are of limited value.
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This chapter addresses the economics of certain types of value-added networks (VANs) that are common in the financial sector and are becoming widespread in other sectors. It investigates the effect of different pricing regimes on allocative efficiency, and studies the nature of competition between vendors of these services. It emerges that there is a very strong tendency toward monopoly in VAN industries. VANs appear to be a classic case of natural monopoly, although this is not dependent on increasing returns in their technologies. The main cause is externalities between users, which lead to a “critical mass” phenomenon. A VAN is only economically viable after a certain critical mass of users is achieved. Standard prescriptions for achieving efficiency in such situations, such as marginal cost pricing and interconnection, are of limited value.
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