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Oligopoly with network effects: firm-specific versus single network

Rabah Amir (), Igor Evstigneev () and Adriana Gama ()
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Igor Evstigneev: University of Manchester
Adriana Gama: El Colegio de México

Economic Theory, 2021, vol. 71, issue 3, No 13, 1203-1230

Abstract: Abstract We consider symmetric oligopolies with positive network effects where each firm has its own proprietary network, which is incompatible with that of its rivals. We provide minimal conditions for the existence of (non-trivial) symmetric equilibrium in a general setting. We analyze the viability of industries with firm-specific networks and show that the prospects for successful launch decrease with more firms in the market. This is a major reversal from the case of single-network industries. A central part of the paper compares the viability and market performance of industries with compatible and incompatible networks and shows that viability, output, (endogenous) demand, and social welfare are higher for the former. However, the comparison of industry price, profit and consumer surplus requires respective qualifications, of a general nature for the former two but not for the latter. Overall, these results provide theoretical grounding in a general but not universal sense for the conventional view that compatibility leads to superior performance, which was hitherto based on case studies and stylized facts.

Keywords: Network effects; Network industries; Demand-side economies of scale; Compatibility; Incompatibility (search for similar items in EconPapers)
JEL-codes: C72 D43 L13 L14 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s00199-019-01229-0

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