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Network externalities in a dynamic monopoly

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  • Luca Lambertini
  • Raimondello Orsini

Abstract

We reconsider the role of network externalities in a dynamic spatial monopoly where the firm must invest in order to accumulate capacity, while consumers may have either linear or quadratic preferences. We (1) characterise saddle point equilibria, (2) prove that the extent of market coverage is increasing in the network effect and (3) unlike the existing static literature on the same problem, the monopolist may not make introductory price offers. Then, we briefly deal with the socially optimal solution, showing that, in general, a planner would serve more consumers than a profit-seeking monopolist. Copyright Springer-Verlag 2007

Suggested Citation

  • Luca Lambertini & Raimondello Orsini, 2007. "Network externalities in a dynamic monopoly," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 15(1), pages 105-117, March.
    • Handle: RePEc:spr:cejnor:v:15:y:2007:i:1:p:105-117
    DOI: 10.1007/s10100-006-0020-9
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    1. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    2. Luca Lambertini & Raimondello Orsini, 2001. "Network Externalities and the Overprovision of Quality by a Monopolist," Southern Economic Journal, John Wiley & Sons, vol. 67(4), pages 969-982, April.
    3. Cabral, Luis M. B. & Salant, David J. & Woroch, Glenn A., 1999. "Monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 199-214, February.
    4. Giacomo Bonanno, 1987. "Location Choice, Product Proliferation and Entry Deterrence," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(1), pages 37-45.
    5. Vincenzo Denicolo' & Paolo Garella, 1999. "Rationing in a Durable Goods Monopoly," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 44-55, Spring.
    6. Economides, Nicholas & Encaoua, David, 1996. "Special issue on network economics: Business conduct and market structure," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 669-671, October.
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    Cited by:

    1. Luca Lambertini & Raimondello Orsini, 2010. "R&D for Quality Improvement and Network Externalities," Networks and Spatial Economics, Springer, vol. 10(1), pages 113-124, March.
    2. Jen-Ming Chen & Hung-Liang Cheng, 2012. "Effect of the price-dependent revenue-sharing mechanism in a decentralized supply chain," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 20(2), pages 299-317, June.

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    More about this item

    Keywords

    Monopoly; Network externality; Critical mass; Capital accumulation; D62; D92; L12; 91A23;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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