Network Externalities and Friendly Neighbors: When Firms Choose to Invite Competition

34 Pages Posted: 19 Aug 2016 Last revised: 23 Mar 2017

See all articles by Dustin White

Dustin White

University of Nebraska at Omaha - Department of Economics

Ben Smith

University of Nebraska at Omaha - Department of Economics

Date Written: March 22, 2017

Abstract

Economic theory on the subject of barriers to entry focuses almost exclusively on firms seeking to preserve market power and economic profits. In this paper, we propose that, under certain circumstances, firms may instead choose to reduce barriers to entry as a profit-maximizing mechanism. We model this behavior and show that, under certain conditions, profit can increase for some existing firms as the number of firms in the industry increases. We provide evidence of this behavior from three distinct industries: personal computers, non-petroleum cars and professional American football.

Keywords: entry and exit, network externalities, industry structure, barriers to entry

JEL Classification: D43, L11, L13, L24, O32

Suggested Citation

White, Dustin and Smith, Ben, Network Externalities and Friendly Neighbors: When Firms Choose to Invite Competition (March 22, 2017). Available at SSRN: https://ssrn.com/abstract=2824722 or http://dx.doi.org/10.2139/ssrn.2824722

Dustin White (Contact Author)

University of Nebraska at Omaha - Department of Economics ( email )

College of Business Administration
60th and Dodge Streets
Omaha, NE 68182
United States

HOME PAGE: http://www.dustinrwhite.com

Ben Smith

University of Nebraska at Omaha - Department of Economics ( email )

College of Business Administration
60th and Dodge Streets
Omaha, NE 68182
United States

HOME PAGE: http://bensresearch.com

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