Price competition in a differentiated products duopoly under network effects

We examine price competition under product-specific network effects, in a duopoly where the products are differentiated both horizontally and vertically. We emphasize the role of consumers’ expectations formation. When expectations are not influenced by prices, the market may be shared but shares must be equal unless product qualities differ or one firm, possibly even the low-quality one, may capture the entire market. When expectations are influenced by prices, which would be the case when there is commitment, competition becomes more intense and the high-quality firm tends to capture a larger market share. Under strong network effects there is a continuum of equilibria and the higher the prices, the smaller the difference between those prices can be. Requiring continuity of expectations, however, delivers a unique equilibrium where one firm captures the entire market.     

DYNAMIC PRICE COMPETITION WITH CAPACITY CONSTRAINTS AND A STRATEGIC BUYER

We analyze a simple dynamic durable good model. Two incumbent sellers and potential entrants choose their capacities at the start of the game. We solve for equilibrium capacity choices and the (necessarily mixed) pricing strategies. In equilibrium, the buyer splits the order with positive probability to preserve competition, making it possible that a high and low price seller both have sales. Sellers command a rent above the value of unmet demand by the other seller. A buyer benefits from either a commitment not to make future purchases or by hiring an agent to always buy from the lowest priced seller.     

Investment dynamics in markets with endogenous demand

I examine entry into markets where demand is an increasing function of past sales because of learning, networks, or fashion. Demand is initially unknown (with firms learning in Bayesian fashion) and grows endogenously over time. The competitive expansion path and the efficient/monopoly solution differ not only with respect to levels (the market's investment is too low), but also time patterns : externalities contribute to S-shaped diffusion. There is also path-dependence: small initial differences may determine whether the market will grow or not open. Policy arguments for subsidizing entry into new markets, especially in infant export industries, are examined.     

Foreign Direct Investment and Exports with Growing Demand

We explore entry into a foreign market with uncertain demand growth. A multinational can serve the foreign demand by two modes, or by a combination thereof: it can export its products, or it can create productive capacity via foreign direct investment (FDI). The advantage of FDI is that it allows for lower marginal cost than exporting does. The disadvantage is that FDI is irreversible and, hence, entails the risk of creating under-utilized capacity in the case that the market turns out to be small. The presence of demand uncertainty and irreversibility gives rise to an interior solution, where the multinational, under certain conditions, both exports its products and does FDI.     

The Impact of the Concession of 14 Regional Greek Airports on Passenger Traffic

Journal of Industry, Competition and Trade - Greece implemented an extensive privatization program in the past decade, which included the concession of 14 regional airports for a period of...