Entry and mergers in oligopoly with firm-specific network effects
- PDF / 412,897 Bytes
- 26 Pages / 439.37 x 666.142 pts Page_size
- 88 Downloads / 211 Views
Entry and mergers in oligopoly with firm-specific network effects Adriana Gama1
· Rim Lahmandi-Ayed2
· Ana Elisa Pereira3
Received: 11 June 2020 / Accepted: 24 September 2020 / Published online: 1 October 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract This paper investigates the effects of exogenous entry on market performance, and the profitability and welfare effects of horizontal mergers in symmetric Cournot oligopolies with firm-specific network effects. With strategic substitutes in the Cournot part of the model, per-firm output is declining in the number of firms, but industry output, price, per-firm profit, consumer surplus and social welfare may go either way in response to entry. We identify respective sufficient conditions for each possibility. The counter-intuitive conclusions tend to require strong network effects. We study the scope for profitability of mergers and the associated welfare effects. In a general analysis, we provide a sufficient condition on inverse demand for a merger to be profitable, which amounts to requiring strong network effects. Under the condition that leads to higher industry output with entry, mergers are always social welfare-enhancing. Keywords Network effects · Network industries · Demand-side economies of scale · Incompatibility · Mergers JEL Classification C72 · D43 · L13 · L14
B
Ana Elisa Pereira [email protected] Adriana Gama [email protected] Rim Lahmandi-Ayed [email protected]
1
Centro de Estudios Económicos, El Colegio de México, Mexico City, Mexico
2
ESSAI and Unité MASE-ESSAI, University of Carthage, Tunis, Tunisia
3
School of Business and Economics, Universidad de los Andes, Santiago, Chile
123
1140
A. Gama et al.
1 Introduction The study of industries with network externalities has focused more on the case of a single industry-wide network, or where firms’ products are perfectly compatible with each other, and less on the case of firm-specific networks or incompatible products. This focus is in line with the perception in the business strategy literature that the case of firm-specific networks leads to transient phases of competition, as is reflected in the highly publicized cases of standards wars (e.g., Shapiro and Varian 1998; Rohlfs 2003). Network effects generate a complex demand structure wherein consumers’ individual demands are positively interdependent: a consumer’s willingness to pay depends in a significant way on the number of consumers who are expected to purchase the same product. Rohlfs (1974) pioneered the study of such demand systems and proposed a simple and tractable model for conceptualizing such industries. Katz and Shapiro (1985) extended Rohlfs’ analysis to network industries under imperfect competition.1 To reduce the model to a static framework, they proposed a notion of Cournot equilibrium with an endogenous inverse demand function that reflects economy-wide rational expectations about the right market size. They investigated two different models: industry-wide and firm-specific networks
Data Loading...
