Network Externalities in a Dynamic Monopoly

Abstract

We reconsider the role of network externalities in a dynamic spatial monopoly where the firm must invest in order to accumulate capacity, while consumers may have either linear or quadratic preferences. We (i) characterise saddle point equilibria, (ii) prove that the extent of market coverage is increasing in the network effect and (iii) unlike the existing static literature on the same problem, the monopolist may not make introductory price offers. Then, we briefly deal with the socially optimal solution, showing that, in general, a planner would serve more consumers than a profit-seeking monopolist.