Network Externalities and Endogenous Timing in Managerial Firms

Abstract

We investigate the choice of endogenous timing by managerial firms in the presence of network externalities under Bertrand competition. Contrast to the results of sequentiality in equilibrium, we demonstrate that when managers are being delegated both the market and timing decision, there exists a unique simultaneous move in equilibrium regardless of network externalities. However, when the choice of timing remains in the owners’ hands, if the network externalities are weak, it involves one owner of firm producing as a leader and the other owner of firm as a follower while there exists a unique simultaneous move in equilibrium if the network externalities are strong. Thus, the strength of network externalities plays an important role in both firms’ choice of roles and consensus between owner and manager. Consequently, from the viewpoint of social welfare and consumer surplus, Pareto superiority can be obtained endogenously when the strength of network externalities is strong under either consumers’ fulfilled or rational expectation.