Pricing a Network Good To Deter Entry

This paper develops a model of pricing to deter entry by a sole supplier of a network good. We show that the installed user base of a network good can serve a preemptive function similar to that of an investment in capacity if the entrant’s good is incompatible with the incumbent’s good and there are network externalities in demand. Consequently, the threat of entry can lead the incumbent to set low prices. We identify some factors that should be considered in thinking about the welfare effects of entry deterrence in this and similar models.