Network Externalities, Complementarities, and Invitations to Enter

European Journal of Political Economy, Vol. 12, 1996

Posted: 10 Jan 2000

See all articles by Nicholas Economides

Nicholas Economides

New York University - Leonard N. Stern School of Business - Department of Economics

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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.

Note: This is a description of the paper and is not the actual abstract.

JEL Classification: L11, L12, L14

Suggested Citation

Economides, Nicholas, Network Externalities, Complementarities, and Invitations to Enter. European Journal of Political Economy, Vol. 12, 1996, Available at SSRN: https://ssrn.com/abstract=201713

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