Dynamic competition with network externalities: how history matters

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 join 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.

Replaces

Hanna Halaburda, Bruno Jullien, and Yaron Yehezkel, “Dynamic Competition with Network Externalities: Why History Matters”, TSE Working Paper, n. 16-636, March 2016, revised July 2019.

Reference

Hanna Halaburda, Bruno Jullien, and Yaron Yehezkel, “Dynamic competition with network externalities: how history matters”, The RAND Journal of Economics, vol. 51, March 2020, pp. 3–31.