Competition and investment in on-demand networking technology

Abstract

Modern on-demand networking technologies (e.g., WiFi-Direct) improve users' networking experiences (e.g., enable them to connect to any WiFi enabled devices). Manufactures of wireless devices may choose to provide these technologies to make their products more appealing and charge a higher price. The perceived benefits from these technologies depend on how many other users are in the network, which we refer to as “positive network effect”. In this paper, we study such a scenario and develop a price-competition based model for the market, where device manufacturers may choose to invest in on-demand technology with positive network effect and consumers choose whether to participate in the market and which manufacturer to buy from. While the positive network effect can give some firms a competitive advantage, leading to a monopolistic market outcome, we show that market equilibrium always exists and the social welfare is larger when the network effect is strong enough. This is because although only the “best” firms have positive market shares at equilibrium, competition from other firms limits the best firms' actions. For a case study of linear demand and network effects, we have analytical characterizations of the equilibrium and show that competition drives firms to invest more on technology and set lower prices at equilibrium, which improves equilibrium social welfare. Numerical studies suggest that these observations may hold in more general settings.