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Dynamic Duopoly Competition with Switching Costs and Network Externalities

Author

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  • Doganoglu Toker

    (Institute of Economics and Social Sciences, University of Würzburg, Sanderring 2, Würzburg, D-97070, Germany)

  • Grzybowski Lukasz

    (Telecom ParisTech, Department of Economics and Social Sciences, 46 rue Barrault, 75013 Paris, France and School of Economics, Faculty of Commerce, University of Cape Town, Private Bag, Rondebosch 7701, Cape Town, South Africa)

Abstract

This paper analyzes competition in a two-period differentiated-products duopoly in the presence of both switching costs and network effects. We show that they have opposite implications on the demand side, specially in the first period. Switching costs reduce demand elasticities and network effects increase them. We derive the symmetric subgame perfect equilibrium outcome of the two-period competition. An increase in marginal network benefits implies lower prices in both periods while the effect of an increase switching costs is ambiguous. We show that the first-period equilibrium prices are U-shaped in switching costs and decrease when switching costs increase around zero. Furthermore, we show that prices in a market with network effects and switching costs may be lower than those in a market without these features, with only switching costs and with only network effects.

Suggested Citation

  • Doganoglu Toker & Grzybowski Lukasz, 2013. "Dynamic Duopoly Competition with Switching Costs and Network Externalities," Review of Network Economics, De Gruyter, vol. 12(1), pages 1-25, March.
    • Handle: RePEc:bpj:rneart:v:12:y:2013:i:1:p:1-25:n:2
    DOI: 10.1515/rne-2012-0010
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    8. Grilo, Isabel & Shy, Oz & Thisse, Jacques-Francois, 2001. "Price competition when consumer behavior is characterized by conformity or vanity," Journal of Public Economics, Elsevier, vol. 80(3), pages 385-408, June.
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    Cited by:

    1. Grzybowski, Lukasz, 2005. "Essays on Economics of Network Industries: Mobile Telephony," Munich Dissertations in Economics 5561, University of Munich, Department of Economics.
    2. Weiergräber, Stefan, 2014. "Network Effects and Switching Costs in the US Wireless Industry," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 512, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    3. Dejan Trifunović & Đorđe Mitrović, 2018. "Pro-Competitive Regulatory Policies For Post-Paid And Pre-Paid Mobile Phone Markets," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 63(218), pages 85-104, July – Se.
    4. Reme Bjørn-Atle, 2019. "Competition in Markets with Quality Uncertainty and Network Effects," Review of Network Economics, De Gruyter, vol. 18(4), pages 205-242, December.
    5. Mothobi, Onkokame, 2022. "The impact of telecommunication regulatory policy on mobile retail price in Sub-Saharan African countries," Information Economics and Policy, Elsevier, vol. 58(C).
    6. Timothy Keller & David Miller & Xiahua (Anny) Wei, 2010. "A Steady State Approach to a Network Externality Market With Switching Costs," Working Papers 10-19, NET Institute.
    7. Karamti, Chiraz, 2019. "Lopsided effects of telecom reforms on mobile markets in the enlarged EU: Evidence from dynamic quantile model," Telecommunications Policy, Elsevier, vol. 43(3), pages 238-261.
    8. Xiaojing Liu, 2016. "Contracting for Competitive Supply Chains under Network Externalities and Demand Uncertainty," Discrete Dynamics in Nature and Society, Hindawi, vol. 2016, pages 1-9, April.
    9. Weiergräber, Stefan, 2014. "Network Effects and Switching Costs in the US Wireless Industry," Discussion Papers in Economics 25094, University of Munich, Department of Economics.
    10. Jiawei Chen, 2009. "Switching Costs and Dynamic Price Competition in Network Industries," Working Papers 09-25, NET Institute, revised Apr 2010.

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    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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