nep-ind New Economics Papers
on Industrial Organization
Issue of 2007‒03‒17
two papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Computable Markov-Perfect Industry Dynamics: Existence, Purification, and Multiplicity By Ulrich Doraszelski; Mark Satterthwaite
  2. Entry into a network industry: consumers’ expectations and firms’ pricing policies By Angelo Baglioni

  1. By: Ulrich Doraszelski; Mark Satterthwaite
    Date: 2007–03–14
    URL: http://d.repec.org/n?u=RePEc:cla:levrem:321307000000000912&r=ind
  2. By: Angelo Baglioni (DISCE, Università Cattolica)
    Abstract: This paper presents a model of entry into a network industry. The entrant tries to attract the customer base of the incumbent service provider. While the entrant is more efficient, the incumbent enjoys an advantage thanks to a bias in consumers’ expectations. Buyers enter the game with heterogenous beliefs as to which of the two firms is going to win competition. Then expectations converge - through higher order beliefs - and select one winner, who ends up being the single supplier. The path of expectations convergence crucially depends on the pricing policy followed by firms: so equilibrium beliefs are endogenous. Depending on parameter values, one of two outcomes obtains: (i) the incumbent is able to exclude the entrant, by lowering his price below the monopoly level; (ii) the entrant is successful, by undercutting the incumbent price. Productive efficiency and consumers’ welfare are hurt by exclusion; the entry threat is beneficial to consumers anyway. Imposing compatibility among networks is welfare improving, as it removes the exclusionary potential enjoyed by the incumbent.
    Keywords: network industries, critical mass, entry, exclusion, higher order beliefs
    JEL: D42 D84 L12 L41
    Date: 2006–11
    URL: http://d.repec.org/n?u=RePEc:ctc:serie3:ief69&r=ind

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