New Firm Entry in the Presence of Network Effects

10 Pages Posted: 27 Feb 2015 Last revised: 12 Jun 2015

See all articles by Zhiyuan Chen

Zhiyuan Chen

Wuhan University - School of Economics and Management

Xiaoying Liang

City University of Hong Kong - Department of Management Sciences

Lei Xie

Shanghai University of Finance and Economics - School of International Business Administration

Date Written: June 12, 2015

Abstract

We show that in the presence of network effects, the effect of new firm entry on the equilibrium prices and demands of incumbent firms is not clear. In contrast to conventional thinking, we find that incumbent firms could use a higher price, have a larger demand, and earn a higher profit in the new Nash equilibrium. These perverse results arise from the fact that in the event of new firm entry, network effects can create unbalanced demand transfers between incumbent firms, and some incumbent firms can actually benefit from new entry.

Keywords: new entry, equilibrium, network effects

JEL Classification: L11, D41

Suggested Citation

Chen, Zhiyuan and Liang, Xiaoying and Xie, Lei, New Firm Entry in the Presence of Network Effects (June 12, 2015). Available at SSRN: https://ssrn.com/abstract=2571178 or http://dx.doi.org/10.2139/ssrn.2571178

Zhiyuan Chen

Wuhan University - School of Economics and Management ( email )

Wu Han, Hu-Bai 430072
China

Xiaoying Liang (Contact Author)

City University of Hong Kong - Department of Management Sciences ( email )

Kowloon Tong, Kowloon
Hong Kong
34428647 (Phone)

Lei Xie

Shanghai University of Finance and Economics - School of International Business Administration ( email )

777 Guo-ding Road
Shanghai, 200433
China

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