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