Bertrand Competition in Markets with Network Effects and Switching Costs

Irina Suleymanova and Christian Wey

No 796, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: We analyze market dynamics under Bertrand duopoly competition in industries with network effects and consumer switching costs. Consumers form installed bases, repeatedly buy the products, and differ with respect to their switching costs. Depending on the ratio of switching costs to network effects, our model generates convergence to monopoly as well as market sharing as equilibrium outcomes. Convergence can be monotone or alternating in both scenarios. A critical mass effect, where consumers are trapped into one technology for sure only occurs for intermediate values of switching costs, whereas for large switching costs market sharing is the unique equilibrium and for small switching costs both monopoly and market sharing equilibria emerge. We also analyze stationary and stable equilibria, where we show that a monopoly outcome is almost inevitable, if switching costs or network effects increase over time. Finally, we examine firms' incentives to make their products compatible and to create additional switching costs.

Keywords: Network effects; switching costs; Bertrand competition; market dynamics (search for similar items in EconPapers)
JEL-codes: D43 L13 L41 (search for similar items in EconPapers)
Pages: 56 p.
Date: 2008
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind, nep-mic and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Bertrand Competition in Markets with Network Effects and Switching Costs (2011)
Working Paper: Bertrand competition in markets with network effects and switching costs (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:diw:diwwpp:dp796

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