The competitive and welfare effects of long-term contracts with network externalities and bounded rationality

Dawen Meng () and Guoqiang Tian
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Dawen Meng: Shanghai University of Finance and Economics

Economic Theory, 2021, vol. 72, issue 1, No 11, 337-375

Abstract: Abstract This paper compares the long-term and short-term contracts in terms of their competitive and welfare effects in a dynamic nonlinear pricing model with network externalities and bounded rationality. Contrary to the existing literature and traditional treatments adopted by competition authorities, we find that a long-term contract is at least as competition-friendly and socially efficient as a sequence of short-term contracts. If the consumers have constant types and pessimistic expectation regarding the network size, then for a certain range of parameters, a long-term contract facilitates entry of more efficient competitors and is socially more efficient than the short-term contracts. If the consumers’ types are independent across time, a long-term contract leads to the same competitive outcome as, but gives a higher social surplus than, its short-term counterpart.

Keywords: Nonlinear pricing; Long-term contract; Entry deterrence; Network effect; Bounded rationality (search for similar items in EconPapers)
JEL-codes: D62 D82 L12 L44 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s00199-020-01283-z

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