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Investing in Network Strength, Consumer Expectations, and the Mode of Competition

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Abstract

In a duopoly model with network externalities, this paper studies Cournot and Bertrand firms’ optimal investments in network strength under passive and responsive consumer expectations, and looks at the welfare implications. The results suggest minimum sufficient threshold levels of initial network strength for which (i) the optimal investment levels by both Cournot and Bertrand firms are greater under responsive expectations; (ii) Cournot firms invest more than Bertrand firms under responsive expectations, whereas Bertrand firms invest more than Cournot firms under passive expectations. These threshold levels are also sufficient in that welfare is (i) greater under responsive expectations than under passive expectations for a given competition mode, and (ii) greater under Bertrand competition than under Cournot competition for a given type of consumer expectations.

Suggested Citation

  • Onur A. Koska, 2022. "Investing in Network Strength, Consumer Expectations, and the Mode of Competition," Working Papers in Economics 22/09, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:22/09
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    More about this item

    Keywords

    Network strength; investment; consumer expectations; Cournot duopoly; Bertrand duopoly;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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