Note on Excess Capacity in a Monopoly Market with Network Externalities

Abstract

Using a capacity-then-production choice model, we consider whether excess capacity results hold, when there is one provider, i.e., a monopoly or a public firm, in a network product and service market. In the case of a monopoly, if consumers form expectations of network sizes after (before) a capacity-scale decision, the capacity scale is larger than (equal to) the production quantity. Thus, excess capacity results hold (do not hold). Furthermore, in the case of a public firm, excess capacity results do not hold, irrespective of the timing of consumer expectations. However, this result depends on the specification of the utility function.