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Journal of Economics

, Volume 105, Issue 2, pp 101–127 | Cite as

On the role of consumer expectations in markets with network effects

  • Irina Suleymanova
  • Christian WeyEmail author
Article

Abstract

We analyze the role of consumer expectations in a Hotelling model of price competition when products exhibit network effects. Expectations can be strong (stubborn), weak (price-sensitive) or partially stubborn (a mix of weak and strong). As a rule, the price-sensitivity of demand declines when expectations are more stubborn. An increase of stubbornness (i) increases (decreases) the parameter region with a unique duopoly equilibrium (multiple equilibria), (ii) reduces competition, (iii) reduces the conflict between consumer and social preferences for de facto standardization, and (iv) reduces the misalignment between consumer and social preferences for compatibility.

Keywords

Network effects Expectations Duopoly Compatibility Welfare 

JEL Classification

D43 D84 L13 

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Copyright information

© Springer-Verlag 2011

Authors and Affiliations

  1. 1.Heinrich-Heine Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE)DüsseldorfGermany

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