Intercommection Incentives of a Large Network Facing Multiple Rivals

Abstract

This paper extends Cremer, Rey and Tirole’s analysis of whether a firm with the most installed-base customers, in a market exhibiting network externalities, gains by degrading interconnection with rivals that compete with it for new customers. We allow any number of rivals and consider both tipping equilibria and interior equlibria. Degrading interconnection can yield tipping away from the largest network even if its installed-base share exceeds one half. For all parameter values (including those that admit interior equilibria), a share above one half is necessary but not sufficient to ensure degradation is profitable. Greater scope for market expansion—a lower marginal cost or smaller installed-base relative to potential additional demand—makes profitable degradation less likely.Interconnection, Network Externalities, Exclusion