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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Schirle, Tammy / de Vries, Frans / Zulehner, Christine

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1935-1682
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Volume 11, Issue 1

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Volume 6 (2006)

Volume 4 (2004)

Volume 2 (2002)

Volume 1 (2001)

Bertrand Competition in Markets with Network Effects and Switching Costs

Irina Suleymanova / Christian Wey
Published Online: 2011-09-18 | DOI: https://doi.org/10.2202/1935-1682.2359

Abstract

We analyze Bertrand duopoly competition in markets with network effects and consumer switching costs. Depending on the ratio of switching costs to network effects, our model generates four different market patterns: monopolization and market sharing, which can be either preserved or reversed. A critical mass effect where one firm becomes the monopolist for sure only occurs for intermediate values of the ratio, whereas for large switching costs market sharing is the unique equilibrium. For large network effects, both monopoly and market sharing equilibria exist. Our welfare analysis reveals a conflict between maximization of consumer surplus and social welfare when network effects are large. We also analyze firms’ incentives for compatibility and incentives to increase switching costs and examine how market outcomes are affected by market expansion and cost asymmetries. Finally, in a dynamic extension of our model, we show how competition depends on agents’ discount factors.

Keywords: network effects; switching costs; Bertrand competition; market dynamics

About the article

Published Online: 2011-09-18


Citation Information: The B.E. Journal of Economic Analysis & Policy, Volume 11, Issue 1, ISSN (Online) 1935-1682, DOI: https://doi.org/10.2202/1935-1682.2359.

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