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Pricing Under the Threat of Entry by a Sole Supplier of a Network Good

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  • Drew Fudenberg
  • Jean Tirole

Abstract

This paper develops a model of pricing to deter entry by a sole supplier of a network good. We show that the installed user base of a network good can serve a preemptive function similar to that of an investment in capacity if the entrant's good is incompatible with the incumbent's good and there are network externalities in the demand for each good. Consequently, the threat of entry of an incompatible good can lead the incumbent to set low prices. Although the threat of entry is welfare-enhancing in our model, the welfare effects of actual entry are ambiguous. Put differently, a government policy that led to the entry of a firm that otherwise would not have entered, such as an entry subsidy, may lower welfare. We try to identify the main factors that should be considered in thinking about the welfare effects of entry deterrence in similar models.

Suggested Citation

  • Drew Fudenberg & Jean Tirole, 1999. "Pricing Under the Threat of Entry by a Sole Supplier of a Network Good," Harvard Institute of Economic Research Working Papers 1873, Harvard - Institute of Economic Research.
    • Handle: RePEc:fth:harver:1873
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    Cited by:

    1. Heidrun C. Hoppe & In Ho Lee, 2000. "Entry Deterrence in Durable-Goods Monopoly," Econometric Society World Congress 2000 Contributed Papers 0610, Econometric Society.
    2. Robert E. Hall & Chris E. Hall, 2000. "Toward a Quantification of the Effects of Microsoft's Conduct," American Economic Review, American Economic Association, vol. 90(2), pages 188-191, May.
    3. Richard Schmalensee, 2000. "Antitrust Issues in Schumpeterian Industries," American Economic Review, American Economic Association, vol. 90(2), pages 192-196, May.

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