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Strategic complementarities and network effects

by Garcia, Filomena

Abstract (Summary)
This thesis deals with different forms of strategic complementarities in industrial organization problems. Chapter 2 is an attempt to develop a unified approach to endogenous heterogeneity by constructing a general class of two-player symmetric games that possess only asymmetric pure-strategy Nash equilibria. These classes of games are characterized in some abstract sense by two general properties: payoff non-concavities and some form of strategic substitutability. While the second characteristic allows to show the existence of pure strategy Nash equilibria, the second precludes these equilibria to be symmetric. Other two classes of games that always possess asymmetric, but never symmetric, pure-strategy equilibria, although they are not of strategic substitutes are also studied. This chapter also generalizes a number of models dealing with two-stage games, with long term investment decisions in the first stage and product market competition in the second stage. Chapter 3 investigates the effects of forward looking behaviour in technology adoption. The setup is an overlapping generations model where agents choose between two alternative networks taking into consideration both the installed base and the expected base. The latter element is the distinctive feature of the approach. It is shown that a unique equilibrium exists, on which agents coordinate their expectations. While exhibiting hysteresis, the equilibrium adoption path does not comply with technologies locking in. Network choices are characterized both in terms of their long run properties and the expected time of adoption. Chapter 4 studies the problem of a monopolist who produces a good with network externalities and faces the possibility of selling a new higher quality. Within the vertical product differentiation it identifies the necessary and sufficient conditions for quality improvement to take place when a good, produced by a monopolist, exhibits positive network externalities. When network effects are not very strong, the monopolist produces both the high and the low quality and thus quality improvement takes place. In this case, he will use an introductory pricing strategy for the quality that benefits from network externalities, not maximizing however the network size. As the network effect becomes more important, the monopolist will have an incentive to practise introductory pricing and produce both qualities. Finally, if the network externality is higher than the intrinsic quality differential, quality improvement does not take place. Chapter 5 deals with the problem of an incumbent producing a low quality good with network externalities that faces the threat of entry by a higher quality good. In the framework of a vertical product differentiation model, it is identified a necessary and sufficient condition under which quality improvements are spontaneously adopted along, in spite of the existence of network effects. This condition says that the intensity of network effects on consumers' preferences should not exceed twice the differential of intrinsic qualities existing between the two variants. Finally, chapter 6 is concerned with the optimal path of prices of a monopolist who operates in a network industry for a finite horizon. Agents obtain intrinsic utility from the good and from the fact that in the past there have been other consumers using it. It is observed that the monopolist has an incentive to introduce the good at initially low prices and to increase the price as the time goes by. This chapter concludes with a necessary and sufficient condition under which the initial price, and only the initial one is zero. This condition is related both with the intensity of the preferences for the network and with the time horizon of the monopolist.
Bibliographical Information:

Advisor:

School:Université catholique de Louvain

School Location:Belgium

Source Type:Master's Thesis

Keywords:endogenous heterogeneity technology adoption vertical product differentiation

ISBN:

Date of Publication:01/10/2006

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