Location Decisions of Competing Networks

Authors


  • We thank the NET Institute (http://www.NETinst.org) for financial support. We also thank a coeditor, two referees, Simon Anderson, George Deltas, Winand Emons, Sjaak Hurkens, Kieron Meagher, Nikolaos Vettas, Feng Zhu and seminar participants at CRETE 2009, IIOC 2010, and EARIE 2011 for very helpful comments and suggestions. We are responsible for any errors.

Abstract

Early entrants in markets with network effects usually occupy a “central location” and serve agents with “intermediate tastes,” whereas later entrants are niche players. Why would the first entrant choose to become a “general” network, given that later entrants will not have enough room for differentiation, resulting in a more intense competition for market share? In a Hotelling model with two rival networks, we show that for intermediate values of the network externality parameter the location equilibrium is indeed asymmetric: the first entrant locates at the center whereas the second entrant chooses an extreme (niche) location.

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