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Network Size And Network Capture

  • Gerard Llobet

    ()

  • Michael Manove

    ()

    (CEMFI, Centro de Estudios Monetarios y Financieros)

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 complementary 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 competition 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 influenced by the strength of the intellectual-property-rigths environment. Intellectual property rigths and the associated threat of entry may affect and incumbent's choice of network size in counterintuitive ways.

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Paper provided by CEMFI in its series Working Papers with number wp2006_0604.

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Date of creation: Apr 2006
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Handle: RePEc:cmf:wpaper:wp2006_0604
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  1. 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.
  2. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, Elsevier.
  3. 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.
  4. Joseph Farrell and Michael L. Katz., 2001. "Competition or Predation? Schumpeterian Rivalry in Network Markets," Economics Working Papers E01-306, University of California at Berkeley.
  5. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
  6. David S. Evans & Richard Schmalensee, 2001. "Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries," NBER Working Papers 8268, National Bureau of Economic Research, Inc.
  7. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  8. Luis Cabral & David Salant & Glenn Woroch, 1994. "Monopoly Pricing With Network Externalities," Industrial Organization 9411003, EconWPA.
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