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Network Externalities, Complementarities, and Invitations to Enter

Author

Listed:
  • Nicholas Economides

    (Stern School of Business, New York University)

Abstract

We discuss the incentive of an exclusive holder of a technology to share it with competitors in a market with network externalities. We assume that high expected sales increase the willingness to pay for the good. This is named the "network effect". At a stable fulfilled expectations equilibrium, where the actual sales are equal to the expected ones, it is shown that, if the network effect is sufficiently strong, a quantity leader has an incentive to invite entry and license his technology without charge. If the quantity leader has the opportunity to use lump sum license fees, he will invite a larger number of competitors. If no lump sum fees are allowed, the leader will charge a decreasing fee in the intensity of the network externality and will invite entry. In markets with very strong network externalities, the leader pays a subsidy to the invited followers. We also show that the results hold under uncertainty, and when the post-entry competition is Cournot.

Suggested Citation

  • Nicholas Economides, 1997. "Network Externalities, Complementarities, and Invitations to Enter," Industrial Organization 9701004, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpio:9701004
    Note: Type of Document - PDF/PostScript; prepared on IBM PC; to print on HP; pages: 33; figures: included. Published in European Journal of Political Economy vol. 12, (1996), pp. 211-232.
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    References listed on IDEAS

    as
    1. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
    2. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 105-123, March.
    3. Chou, Chien-fu & Shy, Oz, 1990. "Network effects without network externalities," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 259-270, June.
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    6. Gallini, Nancy T, 1984. "Deterrence by Market Sharing: A Strategic Incentive for Licensing," American Economic Review, American Economic Association, vol. 74(5), pages 931-941, December.
    7. Nicholas Economides, 1992. "Network Externalities and Invitations to Enter," Working Papers 92-2, New York University, Leonard N. Stern School of Business, Department of Economics.
    8. Economides, Nicholas & White, Lawrence J., 1994. "Networks and compatibility: Implications for antitrust," European Economic Review, Elsevier, vol. 38(3-4), pages 651-662, April.
    9. Donsimoni, Marie-Paule & Economides, Nicholas S & Polemarchakis, Herakles M, 1986. "Stable Cartels," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 317-327, June.
    10. Jeffrey Rohlfs, 1974. "A Theory of Interdependent Demand for a Communications Service," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 16-37, Spring.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Network externalities; monopoly; quantity leadership; entry; licensing;
    All these keywords.

    JEL classification:

    • L - Industrial Organization

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