Bertrand Competition in Markets with Network Effects and Switching Costs

58 Pages Posted: 27 May 2008

See all articles by Irina Suleymanova

Irina Suleymanova

German Institute for Economic Research (DIW Berlin)

Christian Wey

University of Düsseldorf - Düsseldorf Institute for Competition Economics (DICE)

Date Written: May 2008

Abstract

We analyze market dynamics under Bertrand duopoly competition in industries with network effects and consumer switching costs. Consumers form installed bases, repeatedly buy the products, and differ with respect to their switching costs. Depending on the ratio of switching costs to network effects, our model generates convergence to monopoly as well as market sharing as equilibrium outcomes. Convergence can be monotone or alternating in both scenarios. A critical mass effect, where consumers are trapped into one technology for sure only occurs for intermediate values of switching costs, whereas for large switching costs market sharing is the unique equilibrium and for small switching costs both monopoly and market sharing equilibria emerge. We also analyze stationary and stable equilibria, where we show that a monopoly outcome is almost inevitable, if switching costs or network effects increase over time. Finally, we examine firms' incentives to make their products compatible and to create additional switching costs.

Keywords: Network effects, switching costs, Bertrand competition, market dynamics

JEL Classification: L13, D43, L41

Suggested Citation

Suleymanova, Irina and Wey, Christian, Bertrand Competition in Markets with Network Effects and Switching Costs (May 2008). DIW Berlin Discussion Paper No. 796, Available at SSRN: https://ssrn.com/abstract=1137856 or http://dx.doi.org/10.2139/ssrn.1137856

Irina Suleymanova (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Christian Wey

University of Düsseldorf - Düsseldorf Institute for Competition Economics (DICE) ( email )

Universitaetsstr. 1
Duesseldorf, NRW 40225
Germany
+49-211-81-15009 (Phone)
+49-211-81-15499 (Fax)

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