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Title:Bertrand competition in markets with network effects and switching costs PDF Logo
Authors:Suleymanova, Irina
Wey, Christian
Issue Date:2008
Series/Report no.:Discussion papers // German Institute for Economic Research 796
Abstract:We analyze market dynamics under Bertrand duopoly competition in industries with network effects and consumer switching costs. Consumers form installed bases, repeatedly buy the products, and differ with respect to their switching costs. Depending on the ratio of switching costs to network effects, our model generates convergence to monopoly as well as market sharing as equilibrium outcomes. Convergence can be monotone or alternating in both scenarios. A critical mass effect, where consumers are trapped into one technology for sure only occurs for intermediate values of switching costs, whereas for large switching costs market sharing is the unique equilibrium and for small switching costs both monopoly and market sharing equilibria emerge. We also analyze stationary and stable equilibria, where we show that a monopoly outcome is almost inevitable, if switching costs or network effects increase over time. Finally, we examine firms' incentives to make their products compatible and to create additional switching costs.
Subjects:Network effects
switching costs
Bertrand competition
market dynamics
JEL:L13
D43
L41
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des DIW
DIW-Diskussionspapiere

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