Network Investments Under Different Consumer Expectations and Competition Modes

In a duopoly model with network externalities, this paper studies Cournot and Bertrand firms’ optimal investments in network strength under passive and responsive consumer expectations, and considers the welfare implications. The results suggest some initial network strength thresholds above which responsive consumer expectations lead to greater firm investments in network strength, for a given mode of competition (Cournot or Bertrand). According to the results, Cournot firms invest in network strength more than Bertrand firms when facing responsive consumer expectations. In contrast, Bertrand firms invest in network strength more than Cournot firms when consumers have passive expectations over network sizes, insofar as the initial network is sufficiently strong, or competition is sufficiently weak.