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Bidding for network size

Author

Listed:
  • Foucart, Renaud
  • Friedrichsen, Jana
Abstract
We study a game were two firms compete on investment in order to attract consumers. Below a certain threshold, investment aims at attracting ex-ante indifferent users. Above this threshold firms also compete for users loyal to the other firm. We find that, in equilibrium, firms do not choose their investment deterministically but randomize over two disconnected intervals. These correspond to competing for either the entire population or only the ex-ante indifferent users. While the benefits of attracting users are identical for both firms, the value of remaining passive and not investing at all depends on a firm's loyal base. The firm with the smallest base bids more aggressively to compensate for its lower outside option and achieves a monopoly position with higher probability than its competitor.

Suggested Citation

  • Foucart, Renaud & Friedrichsen, Jana, 2016. "Bidding for network size," MPRA Paper 72136, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:72136
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    firms; quality competition; all-pay auction; status-quo bias;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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