Note on a profit-raising entry effect in a differentiated Cournot oligopoly market with network compatibility

Abstract

Based on a differentiated Cournot oligopoly model with network externalities, we consider how an increase in the number of firms affects an individual firm’s output and profit, i.e., a profit-raising entry effect. We demonstrate that if the degree of network compatibilities is larger (smaller) than that of product substitutability, an increase in the number of firms increases (decreases) the individual firm’s output and profit. That is, a profit-raising (-lowering) entry effect arises. In the case of a profit-raising entry, if the number of firms is sufficiently large, consumer surplus declines although social welfare increases overall because this decline is offset by a sufficient producer surplus increase.