Network Investments Under Different Consumer Expectations and Competition Modes

Gilbert John, Onur Koska and Oladi Reza
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Gilbert John: Department of Economics & Finance, Utah State University, Logan, USA
Oladi Reza: Department of Applied Economics, Utah State University, Logan, USA

The B.E. Journal of Theoretical Economics, 2025, vol. 25, issue 2, 405-436

Abstract: In a duopoly model with network externalities, this paper studies Cournot and Bertrand firms’ optimal investments in network strength under passive and responsive consumer expectations, and considers the welfare implications. The results suggest some initial network strength thresholds above which responsive consumer expectations lead to greater firm investments in network strength, for a given mode of competition (Cournot or Bertrand). According to the results, Cournot firms invest in network strength more than Bertrand firms when facing responsive consumer expectations. In contrast, Bertrand firms invest in network strength more than Cournot firms when consumers have passive expectations over network sizes, insofar as the initial network is sufficiently strong, or competition is sufficiently weak.

Keywords: network strength; investment; consumer expectations; Cournot duopoly; Bertrand duopoly (search for similar items in EconPapers)
JEL-codes: D43 L13 M21 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1515/bejte-2024-0124

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