Template-Type: ReDIF-Paper 1.0
Author-Name: Angelo Baglioni
Author-X-Name-First: Angelo
Author-X-Name-Last: Baglioni
Author-Email: angelo.baglioni@unicatt.it
Author-Workplace-Name: DISCE, Università Cattolica
Title: Entry into a network industry: consumers’ expectations and firms’ pricing policies
Abstract: This paper presents a model of entry into a network industry. The
entrant tries to attract the customer base of the incumbent service provider. While
the entrant is more efficient, the incumbent enjoys an advantage thanks to a bias
in consumers’ expectations. Buyers enter the game with heterogenous beliefs as to
which of the two firms is going to win competition. Then expectations converge
- through higher order beliefs - and select one winner, who ends up being the
single supplier. The path of expectations convergence crucially depends on the
pricing policy followed by firms: so equilibrium beliefs are endogenous. Depending
on parameter values, one of two outcomes obtains: (i) the incumbent is able
to exclude the entrant, by lowering his price below the monopoly level; (ii) the
entrant is successful, by undercutting the incumbent price. Productive efficiency
and consumers’ welfare are hurt by exclusion; the entry threat is beneficial to consumers
anyway. Imposing compatibility among networks is welfare improving, as
it removes the exclusionary potential enjoyed by the incumbent.
Length: 19
Creation-Date: 2006-11
File-URL: http://www.unicatt.it/Istituti/EconomiaFinanza/Quaderni/ief0069.pdf
File-Format: Application/pdf
File-Function: First version, 2006
Number: ief69
Classification-JEL: D42 D84 L12 L41
Keywords: network industries, critical mass, entry, exclusion, higher order beliefs
Handle: RePEc:ctc:serie3:ief0069