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Entry Invitations in a Market with Network Effects

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  • Namhoon Kwon

Abstract

This paper reinvestigates the well-known claim by Economides (1996) that the network effects can lead a monopolist to give away its technology for free. This so-called 'open' strategy is likely to be adopted when marginal network effects are strong but not too strong relative to marginal price effects. Highly elastic demand and highly convex costs also increase the likelihood of such a strategy. I first study the case in which the post-entry market structure is of the Cournot type and later compare the results with the Stackelberg case.

Suggested Citation

  • Namhoon Kwon, 2007. "Entry Invitations in a Market with Network Effects," International Economic Journal, Taylor & Francis Journals, vol. 21(1), pages 49-59.
    • Handle: RePEc:taf:intecj:v:21:y:2007:i:1:p:49-59
    DOI: 10.1080/10168730601180879
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    References listed on IDEAS

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    1. Rabah Amir & Val E. Lambson, 2000. "On the Effects of Entry in Cournot Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(2), pages 235-254.
    2. Joseph Farrell & Nancy T. Gallini, 1988. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(4), pages 673-694.
    3. Seade, J., 1985. "Profitable Cost Increases and the Shifting of Taxation: Equilibrium Responses of Markets in Oligopoly," Economic Research Papers 269225, University of Warwick - Department of Economics.
    4. Economides, Nicholas, 1996. "Network externalities, complementarities, and invitations to enter," European Journal of Political Economy, Elsevier, vol. 12(2), pages 211-233, September.
    5. Seade, J, 1985. "Profitable Cost Increases and the Shifting of Taxation : Equilibrium Response of Markets in Oligopoly," The Warwick Economics Research Paper Series (TWERPS) 260, University of Warwick, Department of Economics.
    6. Kim, Jaehong, 2002. "Product differentiation and network externality: a comment on Economides: "Network externalities, complementarities, and invitations to enter" [Eur. J. Political Economy 12 (1996) 211-233]," European Journal of Political Economy, Elsevier, vol. 18(2), pages 397-399, June.
    7. F. H. Hahn, 1962. "The Stability of the Cournot Oligopoly Solution," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 29(4), pages 329-331.
    8. Andrea Shepard, 1987. "Licensing to Enhance Demand for New Technologies," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 360-368, Autumn.
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