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Network Externalities and Long-Run Market Shares

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  • Skrzypacz, Andrzej

    (Stanford U)

  • Mitchell, Matthew F.

    (U of Iowa)

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

Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1879.

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Date of creation: Jan 2005
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Handle: RePEc:ecl:stabus:1879

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  1. Cabral, L. & Riordan, M., 1992. "The Learning Curve, Market Dominance and Predatory Pricing," Papers 39, Boston University - Industry Studies Programme.
  2. Farrell, Joseph & Saloner, Garth, 1992. "Converters, Compatibility, and the Control of Interfaces," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 9-35, March.
  3. Jovanovic, B. & MacDonald, G.M., 1992. "The Life-Cycle of Competitive Industry," Papers 92-09, Rochester, Business - Financial Research and Policy Studies.
  4. Beggs, Alan & Klemperer, Paul, 1990. "Multi-Period Competition with Switching Costs," CEPR Discussion Papers 436, C.E.P.R. Discussion Papers.
  5. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  6. 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.
  7. 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.
  8. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  9. 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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