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Network Size and Network Capture

  • Gerard Llobet



  • Michael Manove


    (Boston University, Department of Economics)

Most types of networks, over time, spawn the creation of complementary stocks that enhance network value. Computer operating systems, for example, induce the development of the comple- mentary stock of software applications that increase the value of the operating system. In this paper, we challenge the conventional wisdom that a large network, which induces the creation of large complementary stocks, serves as a barrier to entry that protects the incumbent from competi- tion or network capture. We show that a larger network may either deter or attract entry depending on the relation between the network quality and the cost of an innovator?s network product. The probability of entry also depends on the level of compatibility between the potential entrant?s technology and existing complementary stocks, which in turn is in?uenced by the strength of the intellectual-property-rights environment. Intellectual property rights and the associated threat of entry may a¤ect an incumbent?s choice of network size in counterintuitive ways.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2006-007.

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Length: 27pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:bos:wpaper:wp2006-007
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  1. Farrell, Joseph & Klemperer, Paul, 2006. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," CEPR Discussion Papers 5798, C.E.P.R. Discussion Papers.
  2. Joseph Farrell & Michael Katz, 2002. "Competition or Predation? Schumpeterian Rivalry in Network Markets," Industrial Organization 0201003, EconWPA.
  3. David S. Evans & Richard Schmalensee, 2002. "Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries," NBER Chapters, in: Innovation Policy and the Economy, Volume 2, pages 1-50 National Bureau of Economic Research, Inc.
  4. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  5. Luis Cabral & David Salant & Glenn Woroch, 1994. "Monopoly Pricing With Network Externalities," Industrial Organization 9411003, EconWPA.
  6. Joseph Farrell & Garth Saloner, 1985. "Installed Base and Compatibility With Implications for Product Preannouncements," Working papers 385, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
  8. Bensaid, Bernard & Lesne, Jean-Philippe, 1996. "Dynamic monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 837-855, October.
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