On excess capacity in a monopoly market with network externalities

Using a capacity-then-production choice model, we consider whether excess capacity results hold in a monopoly market with network externalities. We demonstrate that if consumers form expectations of network sizes after (before) the capacity-scale decision, the capacity scale is larger than (equal to) the production quantity. Furthermore, we examine the first-best and second-best policies and find that excess capacity results hold (do not hold) in the second-best (first-best) policy, irrespective of the timing of consumer expectations.