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Oligopoly with network effects: firm-specific versus single network

  • Rabah AmirEmail author
  • Igor Evstigneev
  • Adriana Gama
Research Article
  • 108 Downloads

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 

JEL Classification

C72 D43 L13 L14 

Notes

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of IowaIowa CityUSA
  2. 2.School of Business and EconomicsUniversidad de los AndesSantiagoChile
  3. 3.Economics DepartmentUniversity of ManchesterManchesterUK
  4. 4.Centro de Estudios EconómicosEl Colegio de MéxicoMexico CityMexico

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