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Network Size and Network Capture

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  • Gerard Llobet
  • Michael Manove

Abstract

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-rights environment. Intellectual property rights and the associated threat of entry may affect an incumbent’s choice of network size in counterintuitive ways.

Suggested Citation

  • Gerard Llobet & Michael Manove, 2006. "Network Size and Network Capture," Working Papers wp2006_0604, CEMFI.
  • Handle: RePEc:cmf:wpaper:wp2006_0604
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    References listed on IDEAS

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    Cited by:

    1. Rafael Repullo & Javier Suarez, 2008. "The Procyclical Effects of Basel II," Working Papers wp2008_0809, CEMFI.
    2. Luís Cabral, 2011. "Dynamic Price Competition with Network Effects," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(1), pages 83-111.
    3. Norbäck, Pehr-Johan & Persson, Lars & Tå̊g, Joacim, 2014. "Acquisitions, entry, and innovation in oligopolistic network industries," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 1-12.
    4. Jiawei Chen & Ulrich Doraszelski & Joseph E. Harrington, Jr., 2009. "Avoiding market dominance: product compatibility in markets with network effects," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 455-485, September.
    5. Javier Diaz-Gimenez & Josep Pijoan-Mas, 2006. "Flat Tax Reforms in the U.S.: a Boon for the Income Poor," Computing in Economics and Finance 2006 400, Society for Computational Economics.
    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. Joan Llull, 2008. "The Impact of Immigration on Productivity," Working Papers wp2008_0802, CEMFI.
    8. David Martinez-Miera & Rafael Repullo, 2010. "Does Competition Reduce the Risk of Bank Failure?," The Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3638-3664, October.
    9. Chen, Jiawei, 2018. "Switching costs and network compatibility," International Journal of Industrial Organization, Elsevier, vol. 58(C), pages 1-30.
    10. Cabral, Luís, 2012. "Oligopoly Dynamics," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 278-282.

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    More about this item

    JEL classification:

    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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