Entry into a network industry: consumers’ expectations and firms’ pricing policies

Angelo Baglioni ()
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Angelo Baglioni: DISCE, Università Cattolica

No ief69, DISCE - Quaderni dell'Istituto di Economia e Finanza from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

Abstract: This paper presents a model of entry into a network industry. The entrant tries to attract the customer base of the incumbent service provider. While the entrant is more efficient, the incumbent enjoys an advantage thanks to a bias in consumers’ expectations. Buyers enter the game with heterogenous beliefs as to which of the two firms is going to win competition. Then expectations converge - through higher order beliefs - and select one winner, who ends up being the single supplier. The path of expectations convergence crucially depends on the pricing policy followed by firms: so equilibrium beliefs are endogenous. Depending on parameter values, one of two outcomes obtains: (i) the incumbent is able to exclude the entrant, by lowering his price below the monopoly level; (ii) the entrant is successful, by undercutting the incumbent price. Productive efficiency and consumers’ welfare are hurt by exclusion; the entry threat is beneficial to consumers anyway. Imposing compatibility among networks is welfare improving, as it removes the exclusionary potential enjoyed by the incumbent.

Keywords: network industries; critical mass; entry; exclusion; higher order beliefs (search for similar items in EconPapers)
JEL-codes: D42 D84 L12 L41 (search for similar items in EconPapers)
Pages: 19
Date: 2006-11
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