The Economics of Networks: Oligopoly and Monopolistic Competition Under Compatibility The Economics of Networks

3.2.3 Oligopoly and Monopolistic Competition Under Compatibility

Figure 6

Cournot oligopolists producing compatible components also have some influence over expectations. A natural way to model the influence of oligopolists on output expectations is to assume that every oligopolist takes the output of all others as given and sets the expectation of consumers of his own output. In this setting, M compatible Cournot oligopolists support a network of a size between monopoly (M = 1) and perfect competition (M = infinity). The analysis can easily be extended to monopolistic competition among compatible oligopolists if firms face downward-sloping average cost curves as shown in Figure 6. Firms produce on the downward-sloping part of the fulfilled expectations demand. At a symmetric equilibrium, firm j's output is determined at the intersection of marginal cost c and marginal revenue MRj. Price is read off the fulfilled expectations demand p(Mq, Mq). At a monopolistically competitive equilibrium, the AC curve is tangent to the fulfilled expectations demand at qj.

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