DP11205 | Dynamic Competition with Network Externalities: Why History Matters

Publication Date

03/31/2016

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Abstract

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.