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Seoul Journal of Economics - Vol. 29 , No. 3
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Seoul Journal of Economics - Vol. 29, No. 3, pp. 411-429
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 31 Aug 2016
Received 19 Nov 2015 Revised 22 Mar 2016 Accepted 04 May 2016

Entry in a Network Industry with a “Capacity-Then-Production” Choice
Domenico Buccella ; Luciano Fanti
Domenico Buccella, Corresponding author, Assistant Professor, Department of Economics, Kozminski University, Jagellońska Street, 57/59-03301-Warsaw, Poland, Tel: +48 22 51 92 153, Fax: +48 22 51 92 153 (buccella@kozminski.edu.pl)
Luciano Fanti, Professor, Department of Economics and Management, University of Pisa, Via Cosimo Ridolfi, 10, I -56124 Pisa (PI), Italy, Tel: +39 050 22 16 369, Fax: +39 050 22 16 384 (lfanti@ec.unipi.it)

JEL Classification: L13, L20, L21

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.

Keywords: Network externalities, Entry, Deterrence, Capacity choice, Monopoly, Duopoly
Acknowledgments

We are grateful to the two anonymous referees for their valuable and constructive comments and suggestions. Usual disclaimers apply.

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