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Incumbent's Incentive under Network Externalities

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  • Kim, Jaehong
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    Abstract

    This paper shows that an incumbent monopolist's incentive confronting a new entrant depends on the degree of product differentiation and the strength of network externality. If products are homogeneous, the incumbent never wants to invite entry regardless of the degree of network externality. On the other hand, if products are differentiated, duopoly profit is higher than the monopoly profit when products are more differentiated and/or the network externality is weak. Conversely, the incumbent has an incentive to deter entry under strong network externality and/or weak product differentiation. A similar result also holds for the compatibility allowance decision.

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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13811/1/DP404.pdf
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    Bibliographic Info

    Paper provided by Institute of Economic Research, Hitotsubashi University in its series Discussion Paper Series with number a404.

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    Length: 23 p.
    Date of creation: Feb 2001
    Date of revision:
    Handle: RePEc:hit:hituec:a404

    Note: Bibliography: p. 23
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    Related research

    Keywords: network externalities; competition effect; demand effect; product differentiation; entry; compatibility; switching cost;

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    Cited by:
    1. 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.

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