Entry in a Network Industry with a Capacity-Then-Production Choice

Abstract

This study investigates the effect of consumption externalities on entry decision in network industries. A non-monotonic relation exists in the monopoly/duopoly profit differential. A monopolist which has to pay a cost to maintain his dominant position, such as a license fee or lobby expenditures, can block more easily entry for a wide range of network externalities unless these externalities are not exceedingly intense. Therefore, network externalities work as an innocent barrier to entry. The capacity choice of the incumbent in a capacity-then-production model reinforces the innocent entry barrier effect for the potential entrant.