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Snowball: A dynamic oligopoly model with indirect network effects

  • Markovich, Sarit
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    Allowing for innovation dynamics in the software market, this paper studies the conditions under which standardization in the hardware market arises and persists over time. In the model, software firms repeatedly invest in quality upgrades, compete in the product market, and make exit as well as entry decisions. The results show that, in general, excess inertia does not occur. A platform becomes the standard in a market only if it is better than the competing platforms. Furthermore, low overall rates of innovation always lead to variety; conversely, the higher the speed of innovation, the more likely standardization is.

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    File URL: http://www.sciencedirect.com/science/article/B6V85-4NMC861-2/1/3e22a2dfa0cdf5b4574ec95c1ab96fbf
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    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 32 (2008)
    Issue (Month): 3 (March)
    Pages: 909-938

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    Handle: RePEc:eee:dyncon:v:32:y:2008:i:3:p:909-938
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    1. Auriol, E. & Benaim, M., 1998. "Standardization in Decentralized Economies," G.R.E.Q.A.M. 98a30, Universite Aix-Marseille III.
    2. Gandal, N. & Greenstein, S. & Salant, D., 1995. "Adoptions and Orphans in the Early Microcumputer Market," Papers 02-95, Tel Aviv.
    3. Doraszelski, Ulrich & Satterthwaite, Mark, 2007. "Computable Markov-Perfect Industry Dynamics: Existence, Purification, and Multiplicity," CEPR Discussion Papers 6212, C.E.P.R. Discussion Papers.
    4. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
    5. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 53-82, January.
    6. Kevin M. Murphy & Steven J. Davis, 2000. "A Competitive Perspective on Internet Explorer," American Economic Review, American Economic Association, vol. 90(2), pages 184-187, May.
    7. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
    8. Andrew Caplin & Barry Nalebuff, 1990. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Cowles Foundation Discussion Papers 937, Cowles Foundation for Research in Economics, Yale University.
    9. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
    10. Timothy F. Bresnahan & Shane Greenstein, 1997. "Technological Competition and the Structure of the Computer Industry," Working Papers 97028, Stanford University, Department of Economics.
    11. Shane M. Greenstein, 1993. "Did Installed Base Given an Incumbent Any (Measurable) Advantages in Federal Computer Procurement?," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 19-39, Spring.
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