| 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 |