Dynamic competition with network externalities: how history matters
For helpful comments and discussion, we thank Gary Biglaiser, Tim Bresnahan, Luis Cabral, Carlo Cambini, Annamaria Conti, Jacques Crémer, Renato Gomes, Andrei Hagiu, Pedro Pereira, Markus Reisinger, and Andre Veiga as well as participants at the Fourth Annual Searle Center Conference on Internet Search and Innovation, the 11th Workshop on Media Economics, the Third ICT Conference in Munich, the Multi-Sided Platforms Workshop at NUS, the Conference on the Economics of ICT in Paris, the ZEW Conference on the Economics of ICT in Mannheim, the 8th Taller in Industrial Organization, the 2015 Conference on Economics of Intellectual Property, Software and the Internet in Toulouse, the NYU Stern Economics of Strategy Workshop, the CRES Strategy Conference in St. Louis, and the ESMT Workshop on the Economics of Platforms in Berlin. We gratefully acknowledge financial support from the NET Institute, www.NETinst.org, the Henry Crown Institute of Business Research in Israel, and ANR under grant ANR-17-EURE-0010. This project has also received funding from the European Research Council (ERC) under the European Union's Horizon 2020 research and innovation programme (grant agreement no. 670494).
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.
