Dynamic Competition with Network Externalities: Why History Matters∗ (preliminary and incomplete)

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 ∗We thank Jacques Crémer, Gary Biglaiser, Tim Bresnahan, Pedro Pereira, as well as participants at Fourth Annual Searle Center Conference on Internet Search and Innovation (2013), the 11th Workshop on Media Economics, Third ICT Conference in Munich, and Multi-Sided Platforms Workshop at NUS for comments and discussions. We gratefully acknowledge financial support from the NET Institute, www.NETinst.org. Bruno Jullien acknowledges financial support by the Orange/IDEI convention. †The views expressed in this paper are those of the authors. No responsibility for them should be attributed to the Bank of Canada.