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Network externalities and long-run market shares

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  • Matthew Mitchell

    ()

  • Andrzej Skrzypacz

    ()

Abstract

We study a dynamic duopoly model with diferentiated products and network externalities. New consumers appear each period and the value of the product depends on the size of the network in the current and in the previous period, for example due to availability of add-ons or 'software'. Hence, the market outcome of a given period affects the future periods through its effect on installed base. When the products are of equal quality, we analyze whether or not the market chooses one product as a standard, in other words, if the market shares diverge. We compare the market outcome to a planner's problem and identify cases where the planner would choose one product as the standard but the market is unsuccessful in doing so. When products differ in quality, an inferior product may emerge with all of the market share even when the planner would choose the higher quality product, but only when the discount factor is suffciently large.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 29 (2006)
Issue (Month): 3 (November)
Pages: 621-648

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Handle: RePEc:spr:joecth:v:29:y:2006:i:3:p:621-648

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Related research

Keywords: Network externalities; Duopoly; Evolution of standards; Market power; L1; L5;

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  1. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 53-82, January.
  2. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
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  4. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  5. Jovanovic, Boyan & MacDonald, Glenn M, 1994. "The Life Cycle of a Competitive Industry," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 322-47, April.
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  7. Beggs, Alan & Klemperer, Paul, 1990. "Multi-Period Competition with Switching Costs," CEPR Discussion Papers 436, C.E.P.R. Discussion Papers.
  8. Budd, Christopher & Harris, Christopher & Vickers, John, 1993. "A Model of the Evolution of Duopoly: Does the Asymmetry between Firms Tend to Increase or Decrease?," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 543-73, July.
  9. Nicholas Economides & Fredrick Flyer, 1997. "Compatibility and Market Structure for Network Goods," Working Papers 98-02, New York University, Leonard N. Stern School of Business, Department of Economics.
  10. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
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