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Network Externalities in a Dynamic Monopoly

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  • L. Lambertini
  • R. Orsini

Abstract

We reconsider the role of network externalities in a dynamic spatial monopoly where the firm must invest in order to accumulate capacity, while consumers may have either linear or quadratic preferences. We (i) characterize saddle point equilibria, (ii) prove that the extent of market coverage is increasing in the network effect and (iii) unlike the existing static literature on the same problem, the monopolist may not make introductory price offers. Then, we briefly deal with the socially optimal solution, showing that, in general, a planner would serve more consumers than a profit-seeking monopolist.

Suggested Citation

  • L. Lambertini & R. Orsini, 2002. "Network Externalities in a Dynamic Monopoly," Working Papers 452, Dipartimento Scienze Economiche, Universita' di Bologna.
    • Handle: RePEc:bol:bodewp:452
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    Other versions of this item:

    • Luca Lambertini & Raimondello Orsini, 2007. "Network externalities in a dynamic monopoly," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 15(1), pages 105-117, March.

    References listed on IDEAS

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    1. Giacomo Bonanno, 1987. "Location Choice, Product Proliferation and Entry Deterrence," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(1), pages 37-45.
    2. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    3. Luca Lambertini & Raimondello Orsini, 2001. "Network Externalities and the Overprovision of Quality by a Monopolist," Southern Economic Journal, Southern Economic Association, vol. 67(4), pages 969-982, April.
    4. Cabral, Luis M. B. & Salant, David J. & Woroch, Glenn A., 1999. "Monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 199-214, February.
    5. Luca Lambertini & Raimondello Orsini, 2001. "Network Externalities and the Overprovision of Quality by a Monopolist," Southern Economic Journal, John Wiley & Sons, vol. 67(4), pages 969-982, April.
    6. Economides, Nicholas & Encaoua, David, 1996. "Special issue on network economics: Business conduct and market structure," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 669-671, October.
    7. Vincenzo Denicolo' & Paolo Garella, 1999. "Rationing in a Durable Goods Monopoly," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 44-55, Spring.
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    Cited by:

    1. Jen-Ming Chen & Hung-Liang Cheng, 2012. "Effect of the price-dependent revenue-sharing mechanism in a decentralized supply chain," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 20(2), pages 299-317, June.
    2. Luca Lambertini & Raimondello Orsini, 2010. "R&D for Quality Improvement and Network Externalities," Networks and Spatial Economics, Springer, vol. 10(1), pages 113-124, March.
    3. Terry L. Friesz, 2024. "Differential Multiplant Monopoly on a Freight Network," Networks and Spatial Economics, Springer, vol. 24(4), pages 763-788, December.

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    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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