Bidding for network size

Renaud Foucart and Jana Friedrichsen

MPRA Paper from University Library of Munich, Germany

Abstract: We study a game were two firms compete on investment in order to attract consumers. Below a certain threshold, investment aims at attracting ex-ante indifferent users. Above this threshold firms also compete for users loyal to the other firm. We find that, in equilibrium, firms do not choose their investment deterministically but randomize over two disconnected intervals. These correspond to competing for either the entire population or only the ex-ante indifferent users. While the benefits of attracting users are identical for both firms, the value of remaining passive and not investing at all depends on a firm's loyal base. The firm with the smallest base bids more aggressively to compensate for its lower outside option and achieves a monopoly position with higher probability than its competitor.

Keywords: firms; quality competition; all-pay auction; status-quo bias (search for similar items in EconPapers)
JEL-codes: D43 D44 M13 (search for similar items in EconPapers)
Date: 2016-06-21
New Economics Papers: this item is included in nep-bec, nep-com and nep-net
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