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Incumbent's Incentive under Network Externalities

Author

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  • Kim, Jaehong

Abstract

This paper shows that an incumbent monopolist's incentive confronting a new entrant depends on the degree of product differentiation and the strength of network externality. If products are homogeneous, the incumbent never wants to invite entry regardless of the degree of network externality. On the other hand, if products are differentiated, duopoly profit is higher than the monopoly profit when products are more differentiated and/or the network externality is weak. Conversely, the incumbent has an incentive to deter entry under strong network externality and/or weak product differentiation. A similar result also holds for the compatibility allowance decision.

Suggested Citation

  • Kim, Jaehong, 2001. "Incumbent's Incentive under Network Externalities," Discussion Paper Series a404, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:hituec:a404
    Note: Bibliography: p. 23
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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13811/1/DP404.pdf
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    Cited by:

    1. Fabio Manenti & Ernesto Somma, 2008. "One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 15(3), pages 301-322.
    2. Kim, Jaehong, 2002. "Product differentiation and network externality: a comment on Economides: "Network externalities, complementarities, and invitations to enter" [Eur. J. Political Economy 12 (1996) 211-233]," European Journal of Political Economy, Elsevier, vol. 18(2), pages 397-399, June.

    More about this item

    Keywords

    network externalities; competition effect; demand effect; product differentiation; entry; compatibility; switching cost;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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