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Bertrand competition in markets with network effects and switching costs

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  • Suleymanova, Irina
  • Wey, Christian

Abstract

We analyze Bertrand duopoly competition in markets with network effects and consumer switching costs. Depending on the ratio of switching costs to network effects, our modelerates four different market patterns: monopolization and market sharing which can be either monotone or alternating. A critical mass effect, where one firm becomes the monopolist for sure only occurs for intermediate values of the ratio, whereas for large switching costs market sharing is the unique equilibrium. For large network effcts both monopoly and market sharing equilibria exist. Our welfare analysis reveals a fundamental conflict between maximization of consumer surplus and social welfare when network effects are large. We also analyze firms' incentives for compatibility and we examine how market outcomes are affected by the switching costs, market expansion, and cost asymmetries. Finally, in a dynamic extension of our model, we show how competition depends on agents' discount factors.

Suggested Citation

  • Suleymanova, Irina & Wey, Christian, 2011. "Bertrand competition in markets with network effects and switching costs," DICE Discussion Papers 30, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  • Handle: RePEc:zbw:dicedp:30
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    References listed on IDEAS

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    Cited by:

    1. Gu Yiquan & Wenzel Tobias, 2012. "Price-Dependent Demand in Spatial Models," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-26, March.
    2. Alexei Alexandrov, 2008. "Interconnecting Differentiated Networks," Working Papers 08-07, NET Institute, revised Oct 2008.
    3. Gu, Yiquan & Wenzel, Tobias, 2012. "Transparency, entry, and productivity," Economics Letters, Elsevier, vol. 115(1), pages 7-10.
    4. Fourberg, Niklas, 2017. "Let's lock them in: Collusion under Consumer Switching Costs," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168097, Verein für Socialpolitik / German Economic Association.
    5. repec:bla:jindec:v:65:y:2017:i:1:p:136-182 is not listed on IDEAS
    6. Jiawei Chen-super-†, 2016. "How Do Switching Costs Affect Market Concentration and Prices in Network Industries?," Journal of Industrial Economics, Wiley Blackwell, vol. 64(2), pages 226-254, June.
    7. Haucap, Justus & Herr, Annika & Frank, Björn, 2011. "In vino veritas: Theory and evidence on social drinking," DICE Discussion Papers 37, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    8. Clémence Christin, 2013. "Entry Deterrence Through Cooperative R&D Over-Investment," Recherches économiques de Louvain, De Boeck Université, vol. 79(2), pages 5-26.
    9. Stühmeier Torben & Wenzel Tobias, 2012. "Regulating Advertising in the Presence of Public Service Broadcasting," Review of Network Economics, De Gruyter, vol. 11(2), pages 1-23, June.
    10. Jiawei Chen, 2009. "Switching Costs and Dynamic Price Competition in Network Industries," Working Papers 09-25, NET Institute, revised Apr 2010.
    11. Keser, Claudia & Suleymanova, Irina & Wey, Christian, 2012. "Technology adoption in markets with network effects: Theory and experimental evidence," Information Economics and Policy, Elsevier, vol. 24(3), pages 262-276.
    12. Karacuka, Mehmet & Çatık, A. Nazif & Haucap, Justus, 2013. "Consumer choice and local network effects in mobile telecommunications in Turkey," Telecommunications Policy, Elsevier, vol. 37(4), pages 334-344.
    13. Timothy Keller & David Miller & Xiahua (Anny) Wei, 2010. "A Steady State Approach to a Network Externality Market With Switching Costs," Working Papers 10-19, NET Institute.
    14. Jacques Crémer & Gary Biglaiser, 2012. "Switching Costs and Network Effects in Competition Policy," Chapters,in: Recent Advances in the Analysis of Competition Policy and Regulation, chapter 1 Edward Elgar Publishing.
    15. Doganoglu Toker & Grzybowski Lukasz, 2013. "Dynamic Duopoly Competition with Switching Costs and Network Externalities," Review of Network Economics, De Gruyter, vol. 12(1), pages 1-25, March.
    16. repec:emx:esteco:v:33:y:2018:i:1:p:3-28 is not listed on IDEAS

    More about this item

    Keywords

    Network Effects; Switching Costs; Bertrand Competition;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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