Dynamic Competition with Network Externalities: Why History Matters

We consider dynamic competition among platforms in a market with network externalities. A platform that dominated the market in the previous period be- comes \focal" in the current period, in that agents play the equilibrium in which they join the focal platform whenever such equilibrium exists. Yet when faced with higher-quality competition, can a low-quality platform remain focal? In the nite-horizon case, the unique equilibrium is ecient for \patient" platforms; with an innite time horizon, however, there are multiple equilibria where ei- ther the low- or high-quality platform dominates. If qualities are stochastic, the platform with a better average quality wins with a higher probability, even when its realized quality is lower, and this probability increases as platforms become more patient. Hence social welfare may decline as platforms become more forward looking.