Winning While Losing: Competition Dynamics in the Presence of Indirect Network Effects
30 Pages Posted: 7 Dec 2004 Last revised: 23 Aug 2014
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: Suggested Citation
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