Winning While Losing: Competition Dynamics in the Presence of Indirect Network Effects

30 Pages Posted: 7 Dec 2004 Last revised: 23 Aug 2014

See all articles by Sarit Markovich

Sarit Markovich

Kellogg School of Management

Johannes Moenius

University of Redlands

Date Written: February 2008

Abstract

What determines competition dynamics in markets with indirect network effects? We analyze this question in a dynamic hardware-software framework, where software firms compete in quality upgrades. We identify market structure as a major determinant of competition dynamics. Indirect network effects tie together the performance of firms on the same platform: A successful competitor raises the value of all firms on the same platform, where an unsuccessful firm may enjoy a windfall increase in its market value. In contrast to the tipping result in the literature, we find tendencies towards increasing competition across platforms for a wide range of market structures.

Keywords: Network externalities, research & development, quality competition

JEL Classification: L11, L13, L63

Suggested Citation

Markovich, Sarit and Moenius, Johannes, Winning While Losing: Competition Dynamics in the Presence of Indirect Network Effects (February 2008). Available at SSRN: https://ssrn.com/abstract=627605 or http://dx.doi.org/10.2139/ssrn.627605

Sarit Markovich

Kellogg School of Management ( email )

2211 Campus Drive
Kellogg
Evanston, IL IL 60208
United States

Johannes Moenius (Contact Author)

University of Redlands ( email )

PO Box 3080
Redlands, CA 92373-0999
United States

HOME PAGE: http://www.redlands.edu/Johannes_Moenius.xml

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