Network Externalities and Market Dominance

Robert Akerlof (), Richard Holden and Luis Rayo ()
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Robert Akerlof: University of Warwick, Coventry CV4 7Al, United Kingdom; Centre for Economic Policy Research, London EC1V 0DX, United Kingdom
Luis Rayo: Kellogg School of Management, Northwestern University, Evanston, Illinois 60208

Management Science, 2024, vol. 70, issue 6, 4037-4050

Abstract: We propose a monopoly and Stackelberg duopoly model for “new economy” markets—with a Beckerian S-shaped demand curve at its center—that allows for intermediate degrees of firm focality and consumer heterogeneity. Because of network externalities, firms compete for the dominant market share, rather than the marginal consumer. This leads to a type of limit pricing—from within, rather than from outside the market—where the nondominant firm captures a positive market share that serves as a consolation prize. We characterize how firms’ technologies, “consumer impulses” (which might be influenced by past sales, defaults, or advertising), and network externalities affect competition, and derive implications for firm strategy. Broadly speaking, we find that the dominant firm should adopt an aggressive “top-dog” stance (akin to, but not identical to, that of a firm seeking to deter rival entry), whereas the nondominant firm should respond with an accommodating “puppy-dog” approach.

Keywords: economics; economic theories and analysis pricing; analytic modeling (search for similar items in EconPapers)
Date: 2024
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Working Paper: Network Externalities and Market Dominance (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:6:p:4037-4050

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