Note on the excess entry theorem in the presence of network externalities

Abstract

Focusing on the type of consumer expectations, i.e., passive and responsive expectations, we reconsider the excess entry theorem in the case of Cournot oligopoly with network externalities. We demonstrate that whether the number of firms under free entry is socially excessive or insufficient depends on the type of consumer expectations and the degree of network externalities. That is, in the case of passive expectations, if the degree of network externalities is sufficiently large (small), the number of firms under free entry is socially insufficient (excessive), based on the second-best criteria. However, in the case of responsive expectations, the number of firms under free entry is socially excessive, based on the second-best criteria.