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On the role of consumer expectations in markets with network effects

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  • Irina Suleymanova

    ()

  • Christian Wey

    ()

Abstract

We analyze the role of consumer expectations in a Hotelling model of price competition when products exhibit network effects. Expectations can be strong (stubborn), weak (price-sensitive) or partially stubborn (a mix of weak and strong). As a rule, the price-sensitivity of demand declines when expectations are more stubborn. An increase of stubbornness i) reduces competition, ii) increases (decreases) the parameter region with a unique duopoly equilibrium (multiple equilibria), iii) reduces the conflict between consumer and social preferences for de facto standardization, and iv) reduces the misalignment between consumer and social preferences for compatibility. --

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Bibliographic Info

Article provided by Springer in its journal Journal of Economics.

Volume (Year): 105 (2012)
Issue (Month): 2 (March)
Pages: 101-127

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Handle: RePEc:kap:jeczfn:v:105:y:2012:i:2:p:101-127

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Web page: http://www.springerlink.com/link.asp?id=108909

Related research

Keywords: Network effects; Expectations; Duopoly; Compatibility; Welfare; D43; D84; L13;

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References

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  1. Grilo, Isabel & Shy, Oz & Thisse, Jacques-Francois, 2001. "Price competition when consumer behavior is characterized by conformity or vanity," Journal of Public Economics, Elsevier, vol. 80(3), pages 385-408, June.
  2. Joseph Farrell & Paul Klemperer, 2006. "Co-ordination and Lock-in: Competition with Switching Costs and Network Effects," Economics Papers 2006-W07, Economics Group, Nuffield College, University of Oxford.
  3. Farrell, Joseph, 1989. "Converters, Compatibility, and the Control of Interfaces," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt8161p50b, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Eirik Kristiansen & Marcel Thum, 1997. "R&D incentives in compatible networks," Journal of Economics, Springer, Springer, vol. 65(1), pages 55-78, February.
  5. Baake, Pio & Boom, Anette, 2001. "Vertical product differentiation, network externalities, and compatibility decisions," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 19(1-2), pages 267-284, January.
  6. Gary S. Becker, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," University of Chicago - George G. Stigler Center for Study of Economy and State, Chicago - Center for Study of Economy and State 67, Chicago - Center for Study of Economy and State.
  7. Corneo, Giacomo & Jeanne, Olivier, 1997. "Conspicuous consumption, snobbism and conformism," Journal of Public Economics, Elsevier, vol. 66(1), pages 55-71, October.
  8. Corneo, Giacomo & Jeanne, Olivier, 1997. "Snobs, bandwagons, and the origin of social customs in consumer behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 32(3), pages 333-347, March.
  9. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  10. Shy,Oz, 2001. "The Economics of Network Industries," Cambridge Books, Cambridge University Press, number 9780521800952, 9.
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Cited by:
  1. Corrado Benassi & Marcella Scrimitore, 2013. "Income Distribution in Network Markets," Working Paper Series, The Rimini Centre for Economic Analysis 13_13, The Rimini Centre for Economic Analysis.
  2. Gu, Yiquan & Wenzel, Tobias, 2011. "Transparency, entry, and productivity," DICE Discussion Papers 39, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  3. Suleymanova, Irina & Wey, Christian, 2011. "Bertrand competition in markets with network effects and switching costs," DICE Discussion Papers 30, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  4. Stühmeier Torben & Wenzel Tobias, 2012. "Regulating Advertising in the Presence of Public Service Broadcasting," Review of Network Economics, De Gruyter, De Gruyter, vol. 11(2), pages 1-23, June.
  5. Haucap, Justus & Herr, Annika & Frank, Björn, 2011. "In vino veritas: Theory and evidence on social drinking," DICE Discussion Papers 37, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  6. Christin, Clémence, 2011. "Entry deterrence through cooperative R&D over-investment," DICE Discussion Papers 38, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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