Dr. Hanna Halaburda (Bank of Canada)

Program

• Date: 14.10.2015
  Time: 5pm - 7pm
  Location: Schackstr. 4, room 307
  Topic: "Dynamic Competition with Network Externalities"
   

This paper considers dynamic platform competition in a market with network externalities. A platform that dominated the market in the previous period becomes ''focal" in the current period, in that agents play the equilibrium in which they join the focal platform whenever such equilibrium exists. We ask whether a low-quality but focal platform can maintain its focal position along time, when it faces competition by a non-focal but higher quality platform. We find that when the qualities of the two platforms are constant along time, the low-quality platform can maintain its focal position infinitely if the firms are impatient. When firms are patient, there are multiple equilibria in which either the low-quality platform maintains its focal position indefinitely, or the high-quality platform gains the focal position from the low-quality one and then maintains it indefinitely. If qualities are stochastic, each platform wins in each period with some probability. In this case, an increase in the discount factor can make it easier for a low-quality platform to win. As a result, with stochastic qualities social welfare can decrease the more platforms care about future profits.