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Duopoly Competition with Network Effects in Discrete Choice Models

Ningyuan Chen¹; Ying-Ju Chen^2,3

¹ Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada · ² School of Business and Management, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong · ³ School of Engineering, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong

It has been realized for a long time that network effects play an important role in how market participants compete with each other. Arguably, companies like Facebook and Google are able to gain immense market power by leveraging the network effects of their consumers, despite potential competitors. This paper investigates how the dynamics play out in duopoly competition. We find that when the network effects per unit of consumption are weak, the competitors can co-exist and gain even market shares. As network effects become stronger, it is unstable, and even impossible, for the firms to coexist, and one firm emerges victorious, taking the majority of the market. The study provides a theoretical analysis for commonly observed market phenomena. It may also have implications for antitrust legislation: Special policies need to be created to maintain a competitive market structure for products and services with strong network effects.

DOI

10.1287/opre.2020.2079

Volume

69 (2)

Pages

545-559

Language

en

Export

BibTeX

Sources

crossref