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Inviting Competition to Achieve Critical Mass

Author

Listed:
  • Amir Etziony
  • Avi Weiss

    (Department of Economics, Bar Ilan University)

Abstract

In this paper we analyze a network market in which it is beneficial for a producer to invite competitors to share a market, even when this is not needed in order to affect consumer beliefs. Because of the nature of such goods, the demand curve for network markets typically rises and then falls. If the marginal cost curve of the producer is also upwardly sloping, the firm may be either unable to profitably produce a sufficient quantity to satisfy demand at any price, or may be able to, but benefit more if there are other producers also. Interestingly, optimal behavior by the producer is independent of the type of competition that will exist between the firms after the competitors have entered the market. Because the firm controls the number of entrants, it can always guarantee that it will receive maximal profits given the demand function and its technology. Implications for antitrust legislation and for strategic behavior by the firm are discussed.

Suggested Citation

  • Amir Etziony & Avi Weiss, 2002. "Inviting Competition to Achieve Critical Mass," Working Papers 2002-06, Bar-Ilan University, Department of Economics.
    • Handle: RePEc:biu:wpaper:2002-06
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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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