Network Effects, Market Structure and Industry Performance

49 Pages Posted: 12 Nov 2009

See all articles by Rabah Amir

Rabah Amir

University of Arizona - Department of Economics; University of Arizona

Natalia Lazzati

University of Arizona - Department of Economics

Date Written: September 16, 2009

Abstract

This paper provides a thorough analysis of oligopolistic markets with positive demand-side network externalities and perfect compatibility. The minimal structure imposed on the model primitives is such that industry output increases in a firm's rivals' total output as well as in the expected network size. This leads to a generalized equilibrium existence treatment that includes guarantees for a nontrivial equilibrium, and some insight into possible multiplicity of equilibria. We formalize the concept of industry viability and show that it is always enhanced by having more firms in the market and/or by technological improvements. We also characterize the effects of market structure on industry performance, with an emphasis on departures from standard markets. As per-firm profits need not be monotonic in the number of competitors, we revisit the concept of free entry equilibrium for network industries. The approach relies on lattice-theoretic methods, which allow for a unified treatment of various general results in the literature on network goods. Several illustrative examples with closed-form solutions are also provided.

Keywords: Network effects, demand-side externalities, Cournot oligopoly, su-permodularit

JEL Classification: C72, D43, L13, L14

Suggested Citation

Amir, Rabah and Lazzati, Natalia, Network Effects, Market Structure and Industry Performance (September 16, 2009). NET Institute Working Paper No. 09-27. Available at SSRN: https://ssrn.com/abstract=1499909 or http://dx.doi.org/10.2139/ssrn.1499909

Rabah Amir (Contact Author)

University of Arizona - Department of Economics ( email )

Tucson, AZ 85721
United States

University of Arizona ( email )

Department of History
Tucson, AZ 85721
United States

Natalia Lazzati

University of Arizona - Department of Economics ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

HOME PAGE: http://www.u.arizona.edu/~nlazzati/

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