Dynamic competition with network externalities: how history matters

Hanna Halaburda, Bruno Jullien and Yaron Yehezkel
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Yaron Yehezkel: TAU - Tel Aviv University

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Abstract: We consider dynamic competition among platforms in a market with network externalities. A platform that dominated the market in the previous period becomes "focal" in the current period, in that agents play the equilibrium in which they join the focal platform whenever such equilibrium exists. Yet when faced with higher‐quality competition, can a low‐quality platform remain focal? In the finite‐horizon case, the unique equilibrium is efficient for "patient" platforms; with an infinite time horizon, however, there are multiple equilibria where either the low‐ or high‐quality platform dominates. If qualities are stochastic, the platform with a better average quality wins with a higher probability, even when its realized quality is lower, and this probability increases as platforms become more patient. Hence, social welfare may decline as platforms become more forward looking.

Date: 2020-03
New Economics Papers: this item is included in nep-com, nep-mic, nep-pay and nep-reg
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Published in RAND Journal of Economics, 2020, 51 (1), pp.3-31. ⟨10.1111/1756-2171.12304⟩

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Journal Article: Dynamic competition with network externalities: how history matters (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02550531

DOI: 10.1111/1756-2171.12304

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