Network Externalities, Complementarities, and Invitations to Enter
- Tags:
- Externality,
- Leader,
- Network,
- Networking,
- YoungEntrepreneur.com
- Source:
- YoungEntrepreneur.com
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Overview: We discuss the incentive of an exclusive holder of a technology to share it with competitors in a market with network externalities. We assume that high expected sales increase the willingness to pay for the good. This is named the "network effect". At a stable fulfilled expectations equilibrium, where the actual sales are equal to the expected ones, it is shown that, if the network effect is sufficiently strong, a quantity leader has an incentive to invite entry and license his technology without charge. If the quantity leader has the opportunity to use lump sum license fees, he will invite a larger number of competitors. If no lump sum fees are allowed, the leader will charge a decreasing fee in the intensity of the network externality and will invite entry. In markets with very strong network externalities, the leader pays a subsidy to the invited followers. We also show that the results hold under uncertainty, and when the post-entry competition is Cournot.
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Format: HTML | Date: Jan 2003 | Pages: 1
