Dynamic Duopoly Competition with Switching Costs and Network Externalities

This paper analyzes competition in a two-period differentiated-products duopoly in the presence of both switching costs and network effects. Consumers are assumed to have rational expectation about network sizes, and future prices. The equilibrium prices in both periods are lower than markets with just switching costs and they decrease with the magnitude of network effects. Hence, in any period they might fall below the price level in a market without switching costs and network effects. ∗We would like to thank Volkswagen Stiftung for the generous financial support which made this research possible. All errors are ours.