Incumbent’s Incentive under Network Externalities

This paper shows that an incumbent monopolist's incentive confronting a new entrant depends both on the degree of product differentiation and on the strength of network externality. If products are homogeneous, the incumbent never wants to invite entry regardless of the degree of network externality. On the other hand, if products are differentiated, duopoly profit is higher than the monopoly profit when products are more differentiated and/or the network externality is weak. Conversely, the incumbent has an incentive to deter entry under strong network externality and/or weak product differentiation. A similar result also holds for the compatibility allowance decision by the exclusive holder of a technology.