Network Size and Network Capture

Gerard Llobet and Michael Manove

Working Papers from CEMFI

Abstract: Most types of networks, over time, spawn the creation of complementary stocks that enhance network value. Computer operating systems, for example, induce the development of the complementary stock of software applications that increase the value of the operating system. In this paper, we challenge the conventional wisdom that a large network, which induces the creation of large complementary stocks, serves as a barrier to entry that protects the incumbent from competition or network capture. We show that a larger network may either deter or attract entry depending on the relation between the network quality and the cost of an innovator’s network product. The probability of entry also depends on the level of compatibility between the potential entrant’s technology and existing complementary stocks, which in turn is influenced by the strength of the intellectual-property-rights environment. Intellectual property rights and the associated threat of entry may affect an incumbent’s choice of network size in counterintuitive ways.

Date: 2006
New Economics Papers: this item is included in nep-com, nep-knm, nep-mic, nep-net, nep-soc and nep-tid
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Citations: View citations in EconPapers (6)

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Working Paper: Network Size and Network Capture (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:cmf:wpaper:wp2006_0604

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