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. We show that they have opposite implications on the demand side, specially in the first period. While the former reduces demand elasticities, the latter increases them. We derive the symmetric subgame perfect equilibrium outcome of the two period competition. Increases in marginal network benefits imply lower prices in both periods while the effects of switching costs are ambiguous. However, when network effects are strong, and switching costs are moderate, prices in both periods may be lower than those in a market without network effects and switching costs. We show that this property may be exploited to increase aggregate consumer surplus by instituting a switching tax