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Network Externalities and Long-Run Market Shares

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Author Info
Skrzypacz, Andrzej (Stanford U)
Mitchell, Matthew F. (U of Iowa)

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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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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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
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  2. 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, Blackwell Publishing, vol. 60(3), pages 543-73, July. [Downloadable!] (restricted)
  3. Rossella Argenziano, 2007. "Differentiated Networks: Equilibrium and Efficiency," Economics Discussion Papers 638, University of Essex, Department of Economics. [Downloadable!]
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  4. Beggs, Alan & Klemperer, Paul, 1990. "Multi-Period Competition with Switching Costs," CEPR Discussion Papers 436, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Farrell, Joseph & Saloner, Garth, 1992. "Converters, Compatibility, and the Control of Interfaces," Journal of Industrial Economics, Blackwell Publishing, vol. 40(1), pages 9-35, March. [Downloadable!] (restricted)
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  6. 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. [Downloadable!]
  7. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Blackwell Publishing, vol. 62(1), pages 53-82, January. [Downloadable!] (restricted)
  8. Cabral, Luis M B & Riordan, Michael H, 1994. "The Learning Curve, Market Dominance, and Predatory Pricing," Econometrica, Econometric Society, vol. 62(5), pages 1115-40, September. [Downloadable!] (restricted)
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  9. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  11. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September. [Downloadable!] (restricted)
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  1. Cabral, Luís M B, 2008. "Dynamic Price Competition with Network Effects," CEPR Discussion Papers 6687, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Rossella Argenziano, 2007. "Differentiated Networks: Equilibrium and Efficiency," Economics Discussion Papers 638, University of Essex, Department of Economics. [Downloadable!]
    Other versions:
  3. Christian Dahl Winther, 2007. "Optimal research effort and product differentiation in network industries," Economics Working Papers 2007-19, School of Economics and Management, University of Aarhus. [Downloadable!]
  4. Jiawei Chen & Ulrich Doraszelski & Joseph E. Harrington, Jr., 2008. "Avoiding Market Dominance: Product Compatibility in Markets with Network Effects," Economics Working Paper Archive 537, The Johns Hopkins University,Department of Economics. [Downloadable!]
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