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Dynamic Oligopoly with Network Effects

Listed author(s):
  • Economides, Nicholas
  • Mitchell, Matthew
  • Skrzypacz, Andrzej

We analyze oligopolistic competition in a multi-period dynamic setting for goods with network effects. Two or more infinitely-lived firms produce incompatible products differentiated in their inherent quality. Consumers live for a single period and receive the network effect of the previous period’s sales. We show existence and characterize Markov perfect equilibria that are unique given market shares at the beginning of time. We find that, generally, small network effects help the higher quality firm realize higher prices, sales, and profits. Intermediate network effects lead eventually to monopoly of the firm that provides the higher inherent quality, irrespective of original market shares. Strong network effects lead to a stable monopoly equilibrium in the long run which is achieved by the firm of sufficiently high starting market share. Although the case of monopoly resulting under strong network effects and determined by original market shares has been understood in the academic literature and drives the traditional theory of “tilting†of networks to monopoly, our finding that, for intermediate network effects, the resulting monopoly is only determined by inherent quality is new and qualitatively different than traditional theories of titling to monopoly. We also find that, in the case of small network effects, the dominance of the high quality firm is accentuated as consumers become more patient. Finally, we analyze the impact of the intensity of network effects on the number of firms that survive at the long run equilibrium.

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Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt3z59c4p7.

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Date of creation: 01 Nov 2004
Handle: RePEc:cdl:ucscec:qt3z59c4p7
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  1. Jaskold Gabszewicz, J. & Thisse, J. -F., 1980. "Entry (and exit) in a differentiated industry," Journal of Economic Theory, Elsevier, vol. 22(2), pages 327-338, April.
  2. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-666, May.
  3. Kenneth L. Judd, 2003. "Closed-loop equilibrium in a multi-stage innovation race," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(2), pages 673-695, 03.
  4. Matthew Mitchell & Andrzej Skrzypacz, 2006. "Network externalities and long-run market shares," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 29(3), pages 621-648, November.
  5. Michael Kurth, 1985. "Review," Public Choice, Springer, vol. 45(2), pages 223-224, January.
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