Network Effects, Aftermarkets and the Coase Conjecture : A Dynamic Markovian Approach

This paper analyses the dynamic problem faced by a monopolist firm that produces a durable good (in the primary market) and also participates in the market for complementary goods and services (the aftermarket). Considering the possibility of network effects in both markets, we investigate the Markov Perfect Equilibrium of the dynamic game played by the monopolist and the forward-looking consumers. We characterize the evolution of the monopolist's equilibrium network and the equilibrium price trajectories. We show that the Coase Conjecture remains valid if there are only primary network effects, while it fails when aftermarket network effects are present. We also fi nd that the properties of the Markov Perfect Equilibrium vary drastically with the intensity of aftermarket network effects.