Spatial competition and social welfare in the presence of non-monotonic network effects
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We study a spatial duopoly and extend the literature by giving joint consideration to non-monotonic network effects and endogenous firm location decisions. We show that the presence of network effects (capturing, for example, in-store rather than online sales) improves welfare whenever the total market size is not too large. This effect is lost if network effects are specified in a monotonic fashion, in which case isolating consumers from one another always reduces welfare. We also provide a new rationale for a duopoly to be welfare-preferred to monopoly: in large markets, splitting demand between two firms can reduce utility losses due to crowding.
Savorelli , L & Seifert , J 2017 ' Spatial competition and social welfare in the presence of non-monotonic network effects ' School of Economics and Finance Discussion Paper , no. 1615 , University of St Andrews , St Andrews .
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