Incumbent's Incentive under Network Externalities

Jaehong Kim

No a404, Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: This paper shows that an incumbent monopolist's incentive confronting a new entrant depends on the degree of product differentiation and the strength of network externality. If products are homogeneous, the incumbent never wants to invite entry regardless of the degree of network externality. On the other hand, if products are differentiated, duopoly profit is higher than the monopoly profit when products are more differentiated and/or the network externality is weak. Conversely, the incumbent has an incentive to deter entry under strong network externality and/or weak product differentiation. A similar result also holds for the compatibility allowance decision.

Keywords: network externalities; competition effect; demand effect; product differentiation; entry; compatibility; switching cost (search for similar items in EconPapers)
JEL-codes: D4 L1 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2001-02
Note: Bibliography: p. 23
References: Add references at CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:hit:hituec:a404

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