Study On Competitive Strategies Of The Incumbent In The Market With Direct Network Externalities

Network externalities is such a phenomenon that the utility that one consumer derives from consumption of the goods increases with the number of other agents consuming the same network goods, which is demand-side economies of scale. According to different income mechanism of network consumers, network externalities is divided into direct network externalities and indirect network externalities. In network economy, many industries own new characteristics different from the traditional industries, such as positive feedback mechanism, increasing marginal utility. However, in the market with network externalities, problems such as how should the enterprises compete with other enterprises, and the difference of the market equilibrium from traditional market, are rarely analyzed at home and aboard.On the angle of incumbent in the market with direct network externalities, the dissertation analyzes the operating mechanism of the market and the competitive mechanism of the enterprises in the market. It concludes that the incumbent can take advantage of network externalities to compete with the entrant successfully, maybe become the monopolist of the industry.Though the entry barrier of the entrant is powerful in network externalities market, the entrant can compete with the incumbent, even defeat the incumbent with appropriate competitive strategies. The entrant may adopt destructive innovation on the basis of its advantage of cost and technology, destroying the installed base of the incumbent and gaining new installed base. Hence the incumbent must adopt appropriate strategies to be the leader of the industry. In the market with direct network externalities, the competitive strategies of incumbent can be divided into two large types: entry restraint (price strategies; merger strategies) and entry accommodation (compatibility strategies; product differentiation strategies).The dissertation analyses the optimum strategy combinations adopted by the incumbent and the market equilibrium, social welfare of different strategy combinations though extended Hotelling model, vertical product differentiation model and fitting/assembled product model. The appropriate strategies combination can be contributive to the competition of the incumbent.