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Dynamic Duopoly Competition with Switching Costs and Network Externalities

Listed author(s):
  • 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)

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.

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File URL: https://www.degruyter.com/view/j/rne.2013.12.issue-1/rne-2012-0010/rne-2012-0010.xml?format=INT
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Article provided by De Gruyter in its journal Review of Network Economics.

Volume (Year): 12 (2013)
Issue (Month): 1 (March)
Pages: 1-25

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Handle: RePEc:bpj:rneart:v:12:y:2013:i:1:p:1-25:n:2
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  1. Suleymanova Irina & Wey Christian, 2011. "Bertrand Competition in Markets with Network Effects and Switching Costs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-58, September.
  2. Irina Suleymanova & Christian Wey, 2012. "On the role of consumer expectations in markets with network effects," Journal of Economics, Springer, vol. 105(2), pages 101-127, March.
  3. Baake, Pio & Boom, Anette, 2001. "Vertical product differentiation, network externalities, and compatibility decisions," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 267-284, January.
  4. Jiawei Chen, 2011. "How do Switching Costs Affect Market Concentration and Prices in Network Industries?," 2011 Meeting Papers 1428, Society for Economic Dynamics.
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