Potential Competition and the Prices of Network Goods: Desktop Software

33 Pages Posted: 3 Jul 2004

See all articles by Robert E. Hall

Robert E. Hall

Hoover Institution and Department of Economics, Stanford University; National Bureau of Economic Research (NBER)

Marc Van Audenrode

Université Laval - Département d'Économique; Analysis Group, Inc.

Jimmy Royer

Analysis Group, Inc.; Université de Sherbrooke - Department of Economics

Date Written: April 2003

Abstract

Potential competition restrains the prices of an incumbent seller when the incumbent can alter the environment perceived by an entrant in a way that both discourages entry and lowers prices. When the product has network effects, the incumbent can make its product ubiquitous and place the potential entrant at a disadvantage because customers have experience with the incumbent's product. A primary tool for making a product ubiquitous is low pricing. Hence potential competition lowers the prices of network products. We develop a quantitative model for the desktop software business embodying these principles.

Keywords: oligopoly, markov-perfect equilibrium, limit pricing, potential competition, Microsoft

JEL Classification: D43, C73

Suggested Citation

Hall, Robert E. and Van Audenrode, Marc and Royer, Jimmy, Potential Competition and the Prices of Network Goods: Desktop Software (April 2003). Available at SSRN: https://ssrn.com/abstract=472503 or http://dx.doi.org/10.2139/ssrn.472503

Robert E. Hall (Contact Author)

Hoover Institution and Department of Economics, Stanford University ( email )

Stanford, CA 94305-6010
United States
650-723-2215 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
650-723-2215 (Phone)

Marc Van Audenrode

Université Laval - Département d'Économique ( email )

2325 Rue de l'Université
Ste-Foy, Quebec G1K 7P4 G1K 7P4
Canada
418-656-3125 (Phone)

Analysis Group, Inc. ( email )

1080 Beaver Hall Hill
Suite 1810
Montreal, Quebec H2Z 1S8
Canada

Jimmy Royer

Analysis Group, Inc. ( email )

1000 De La Gauchetiere
Suite 1200
Montreal, Quebec H3B4W5
Canada

Université de Sherbrooke - Department of Economics

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