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The effect of network externalities on entry in a Spence-Dixit model

Author

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  • Domenico Buccella
  • Luciano Fanti

Abstract

This paper studies the effect of consumption externalities on entry decision in network industries in a Spence-Dixit entry model. It is shown that, when entry is considered, the presence of network externalities raises the sunk cost threshold that blocks the potential competitor's entry. However, the difference between the thresholds to deter and accommodate entry enlarges: entry is relatively "less blockaded" but "more deterred" than in a standard goods industry.

Suggested Citation

  • Domenico Buccella & Luciano Fanti, 2016. "The effect of network externalities on entry in a Spence-Dixit model," Discussion Papers 2016/212, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    • Handle: RePEc:pie:dsedps:2016/212
    Note: ISSN 2039-1854
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    File URL: https://www.ec.unipi.it/documents/Ricerca/papers/2016-212.pdf
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    Keywords

    Network externalities; Entry; Deterrence; Monopoly; Duopoly.;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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