Dynamic Competition with Network Externalities: Why 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 be- comes \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 nite-horizon case, the unique equilibrium is ecient for \patient" platforms; with an innite time horizon, however, there are multiple equilibria where ei- ther 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.

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Replaced by

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.

Reference

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.