Luis Rayo, Kellogg School of Management, Northwestern University
Luis Rayo, Kellogg School of Management, Northwestern University
Network Externalities and Market Dominance
Network Externalities and Market Dominance
12 Sep 20181:30 PM – 3:00 PM
Faculty and doctoral students only
We develop a framework to study optimal pricing and price competition in the presence
of multiple equilibria cause by network externalities. This framework provides a simple
aproach to equilibrium selection, base upon consumers’ “impulses,” that yields concise
predictions regarding when firms will be “in” and when “out.” We highlight the role
of past consumption and “influencers” in shaping impulses, and provide a unified explanation
for a variety of stylized facts including why: (i) it is difficulty to become “in”;
(ii) the “in” position is fragile; (iii) “in” firms are not asleep in the sense that
they continuously raise quaility and keep prices low; and (iv) “in” firms acquire
startups to entrench their position.