DP11205 Dynamic Competition with Network Externalities: Why History Matters

Author(s): Hanna Halaburda, Bruno Jullien, Yaron Yehezkel
Publication Date: March 2016
Keyword(s): coordination, dynamic competition, network externalities
JEL(s): L1
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11205

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.