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Intercommection Incentives of a Large Network Facing Multiple Rivals

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Abstract

This paper extends Cremer, Rey and Tirole's analysis of whether a firm with the most installed-base customers, in a market exhibiting network externalities, gains by degrading interconnection with rivals that compete with it for new customers. We allow any number of rivals and consider both tipping equilibria and interior equlibria. Degrading interconnection can yield tipping away from the largest network even if its installed-base share exceeds one half. For all parameter values (including those that admit interior equilibria), a share above one half is necessary but not sufficient to ensure degradation is profitable. Greater scope for market expansion--a lower marginal cost or smaller installed-base relative to potential additional demand--makes profitable degradation less likely.

Suggested Citation

  • David A. Malueg & Marius Schwartz, 2003. "Intercommection Incentives of a Large Network Facing Multiple Rivals," Working Papers gueconwpa~03-03-01, Georgetown University, Department of Economics.
    • Handle: RePEc:geo:guwopa:gueconwpa~03-03-01
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    References listed on IDEAS

    as
    1. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-841, August.
    2. Joseph Farrell & Nancy T. Gallini, 1988. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(4), pages 673-694.
    3. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    4. repec:bla:jindec:v:49:y:2001:i:3:p:319-33 is not listed on IDEAS
    5. T. Randolph Beard & David L. Kaserman & John W. Mayo, 2001. "Regulation, Vertical Integration and Sabotage," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 319-333, September.
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    More about this item

    Keywords

    Interconnection; Network Externalities; Exclusion;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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