Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractA network market is a market in which the benefit each consumer derives from a good is an increasing function of the number of consumers who own the same or similar goods. A major obstacle that plagues the introduction of a network good is the ability to reach critical mass, namely, the minimum number of buyers required to render purchase worthwhile. This can be likened to a coordination game with multiple Pareto-ranked equilibria. We introduce an experimental paradigm to study consumers' ability to coordinate on purchasing the network good. Our results highlight the central importance of the level of the critical mass.

No abstract

Previous authors have suggested inviting competition as a solution to the credibility issues that arise when a new network good is introduced. We suggest an alternative remedy of preproducing the good. The two strategies are compared, as are combinations of these two strategies in two different manners. The comparison yields a deeper understanding about how and why each strategy works.

Abstract. In this paper we considered a new solution to the credibility problem present in network industries. This problem arises because the value of a network good to its owner depends positively on the number of consumers who buy the good. Because of this property, it is in the interest of the producer to try to convince consumers that the market will be large, even if he knows it is untrue. Consumers, in turn, will disregard producer claims, and will, instead, try to reason out what size the market will attain. As a result, a lower than optimal quantity, both for consumers and producers, will be produced, i.e., the resulting equilibrium is Pareto inefficient. Katz and Shapiro (1985) and Economides (1996) suggest a solution to this problem in which the firm invites competitors to share their technology and enter the market, thus voluntarily giving up their monopoly position. We suggest an alternative remedy of pre-producing the good. This has the effect of changing the firm's cost structure in a manner that causes consumers to believe that the amount they will optimally sell (and hence the market size) will increase, again leading to higher profitability. The two strategies are compared, and we show the conditions under which each is preferable. We then consider combinations of these two strategies in two different manners. In the first the leader produces and then invites competitors who then also pre-produce, and in the second the leader pre-produces but the fringe firms do not; rather, they produce in the same period in which they sell. Surprisingly we found that the latter dominated the former, which led us to a better understanding about how and why each strategy works. In short, inviting competitors creates a positive externality that benefits all firms, while pre-producing helps only the firm doing the pre-producing and harms all other firms. Thus, the leader invites competitors so he can benefit from the positive externality, but he is better off if the competitors do not pre-produce.

No abstract