Bidding for network size

Foucart, Renaud and Friedrichsen, Jana (2016): Bidding for network size.

Abstract

We study a game were two firms compete on investment in order to attract consumers. Below a certain threshold, investment aims at attracting ex-ante indifferent users. Above this threshold firms also compete for users loyal to the other firm. We find that, in equilibrium, firms do not choose their investment deterministically but randomize over two disconnected intervals. These correspond to competing for either the entire population or only the ex-ante indifferent users. While the benefits of attracting users are identical for both firms, the value of remaining passive and not investing at all depends on a firm's loyal base. The firm with the smallest base bids more aggressively to compensate for its lower outside option and achieves a monopoly position with higher probability than its competitor.

• Item Type: MPRA Paper
• Language: English
• Keywords: firms, quality competition, all-pay auction, status-quo bias
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D44 - Auctions; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M13 - New Firms ; Startups

References

AGHION , P., BLOOM , N., BLUNDELL , R., GRIFFITH , R. and HOWITT, P. (2005). Competition and innovation: an inverted-u relationship. The Quarterly Journal of Economics, 120 (2), 701-728.

ARBATSKAYA , M. (2007). Ordered search. The RAND Journal of Economics, 38 (1), 119- 126.

ARMSTRONG , M., VICKERS , J. and ZHOU , J. (2009). Prominence and consumer search. The RAND Journal of Economics, 40 (2), 209-233.

BAGWELL , K. (2007). The economic analysis of advertising. Handbook of Industrial Orga nization, 3, 1701-1844.

BAYE , M. R., KOVENOCK , D. and DE VRIES , C. G. (1996). The all-pay auction with complete information. Economic Theory, 8 (2), 291-305.

BURDETT, K. and JUDD , K. L. (1983). Equilibrium price dispersion. Econometrica: Journal of the Econometric Society, pp. 955-969.

FARRELL , J. and KATZ , M. L. (1998). The effects of antitrust and intellectual property law on compatibility and innovation. Antitrust Bulletin, 43, 609.

JIA , H. (2008). A stochastic derivation of the ratio form of contest success functions. Public Choice, 135 (3-4), 125-130.

KLEMPERER , P. (1987). Markets with consumer switching costs. The quarterly journal of economics, pp. 375-394.

MOLDOVANU , B. and S ELA , A. (2001). The optimal allocation of prizes in contests. American Economic Review, pp. 542-558.

PASTINE , I. and PASTINE , T. (2002). Consumption externalities, coordination, and ad vertising. International Economic Review, 43 (3), 919-943.

ROBERSON , B. (2006). The colonel blotto game. Economic Theory, 29 (1), 1-24.

SIEGEL , R. (2009). All-pay contests. Econometrica, 77 (1), 71-92.