Capacity Expansion in Markets with Intertemporal Consumption Externalities

This paper analyzes market capacity expansion in the presence of intertemporal consumption externalities such as consumer learning, networks, and bandwagon effects. An externality leads to an endogenous shift of market demand that responds to past market capacity. Whereas market capacity grows in waves, its magnitude depends on the degree of market concentration. The competitive environment contributes to S-shaped time patterns of market capacity expansion. On the other hand, using a low introductory price, a monopolist plans an initially larger amount of market cultivation than a competitive market capacity expansion