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Dynamic Competition with Network Externalities: Why History Matters

Hanna Halaburda, Bruno Jullien () and Yaron Yehezkel

No 11205, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We consider dynamic competition among platforms in a market with network externalities. A platform that dominated the market in the previous period becomes "focal"; in the current period, in that agents play the equilibrium in which they adopt the focal platform whenever such equilibrium exists. Yet when faced with higher-quality competition, can a low-quality platform remain focal? In the finite-horizon case, the unique equilibrium is efficient for "patient" platforms; with an infinite time horizon, however, there are multiple equilibria where either the low- or high-quality platform dominates. If qualities are stochastic, the platform with a better average quality wins with a higher probability, even when its realized quality is lower, and this probability increases as platforms become more patient. Hence social welfare may decline as platforms become more forward looking.

Keywords: coordination; dynamic competition; network externalities (search for similar items in EconPapers)
JEL-codes: L1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-mic and nep-net
Date: 2016-03
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Working Paper: Dynamic Competition with Network Externalities: Why History Matters (2019) Downloads
Working Paper: Dynamic Competition with Network Externalities: Why History Matters (2016) Downloads
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