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Discussion Paper Details

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Title: Dynamic Competition with Network Externalities: Why History Matters

Author(s): Hanna Halaburda, Bruno Jullien and Yaron Yehezkel

Publication Date: March 2016

Keyword(s): coordination, dynamic competition and network externalities

Programme Area(s): Industrial Organization

Abstract: We consider dynamic competition among platforms in a market with network externalities. A platform that dominated the market in the previous period becomes "focal"; in the current period, in that agents play the equilibrium in which they adopt the focal platform whenever such equilibrium exists. Yet when faced with higher-quality competition, can a low-quality platform remain focal? In the finite-horizon case, the unique equilibrium is efficient for "patient" platforms; with an infinite time horizon, however, there are multiple equilibria where either the low- or high-quality platform dominates. If qualities are stochastic, the platform with a better average quality wins with a higher probability, even when its realized quality is lower, and this probability increases as platforms become more patient. Hence social welfare may decline as platforms become more forward looking.

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Bibliographic Reference

Halaburda, H, Jullien, B and Yehezkel, Y. 2016. 'Dynamic Competition with Network Externalities: Why History Matters'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11205