The value of incumbency in heterogeneous networks

Abstract

We study the dynamics of competition in a model with network effects, an incumbent and entry. We propose a new equilibrium concept which takes formally into account the strategic advantages of incumbency in a static model. We then embed this static analysis in a dynamic framework with heterogeneous consumers. We completely identify the conditions under which two networks will emerge at equilibrium and explore the reasons for inefficiencies of the equilibrium. (with Gary Biglaiser (University of North Carolina).