The Evolution of Dynamic Oligopolies with Network

Snowball The Evolution of Dynamic Oligopolies with Network Externalities by

Sarit Markovich1 The University of Chicago

March 1999

Abstract This paper considers a dynamic oligopolistic market for complementary services (software), in which consumers first decide which one of the two incompatible durable goods (hardware) they wish to adopt and then buy compatible software. Software firms decide whether or not to enter or exit the market, which technology to produce for and how much to invest in the quality level of their products. The results show that when the probability of software innovation is low, in the long run the industry exhibits the snowball effect such that one hardware technology becomes the industry standard. However, if the probability of innovation is high, both hardware technologies remain active in the long run.

1

I wish to thank Chaim Fershtman, Neil Gandal, Gautam Gowrisankaran, Eyal Markovich, Yossi Spiegel, Ariel Pakes and seminar participants at Tel-Aviv University, Toronto University, The Hebrew University,Brandies Univeristy and the University of Chicago. *Correspondence: Sarit Markovich, Dept. of Economics, University of Chicago, Chicago, IL 60637. Tel: 773-702-4862, Fax: 773-702-8490, E-mail: [email protected].

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