Network Externalities, Complementarities, and Invitations to Enter
AbstractWe discuss the incentive of an exclusive holder of a technology to share it with competitors in a market with network externalities. We assume that high expected sales increase the willingness to pay for the good. This is named the "network effect". At a stable fulfilled expectations equilibrium, where the actual sales are equal to the expected ones, it is shown that, if the network effect is sufficiently strong, a quantity leader has an incentive to invite entry and license his technology without charge. If the quantity leader has the opportunity to use lump sum license fees, he will invite a larger number of competitors. If no lump sum fees are allowed, the leader will charge a decreasing fee in the intensity of the network externality and will invite entry. In markets with very strong network externalities, the leader pays a subsidy to the invited followers. We also show that the results hold under uncertainty, and when the post-entry competition is Cournot.
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Bibliographic InfoPaper provided by EconWPA in its series Industrial Organization with number 9701004.
Length: 33 pages
Date of creation: 28 Jan 1997
Date of revision:
Note: Type of Document - PDF/PostScript; prepared on IBM PC; to print on HP; pages: 33; figures: included. Published in European Journal of Political Economy vol. 12, (1996), pp. 211-232.
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Network externalities; monopoly; quantity leadership; entry; licensing;
Other versions of this item:
- Economides, Nicholas, 1996. "Network externalities, complementarities, and invitations to enter," European Journal of Political Economy, Elsevier, vol. 12(2), pages 211-233, September.
- L - Industrial Organization
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