Template-Type: ReDIF-Paper 1.0

Author-Name: Gerard Llobet
Author-X-Name-First: Gerard 
Author-X-Name-Last: Llobet
Author-Email: llobet@cemfi.es
Author-Workplace-Name: CEMFI

Author-Name: Michael Manove
Author-X-Name-First:Michael  
Author-X-Name-Last: Manove
Author-Email: manove@bu.edu
Author-Workplace-Name: Boston University, Department of Economics

Title: Network Size and Network Capture

Abstract: Most types of networks, over time, spawn the creation of complementary stocks that enhance
network value. Computer operating systems, for example, induce the development of the comple-
mentary stock of software applications that increase the value of the operating system. In this
paper, we challenge the conventional wisdom that a large network, which induces the creation of
large complementary stocks, serves as a barrier to entry that protects the incumbent from competi-
tion or network capture. We show that a larger network may either deter or attract entry depending
on the relation between the network quality and the cost of an innovator?s network product. The
probability of entry also depends on the level of compatibility between the potential entrant?s
technology and existing complementary stocks, which in turn is in?uenced by the strength of the
intellectual-property-rights environment. Intellectual property rights and the associated threat of
entry may a¤ect an incumbent?s choice of network size in counterintuitive ways.

Length:  27pages
Creation-Date: 2006-02
Revision-Date:
Publication-Status:
File-URL: http://www.bu.edu/econ/faculty/manove/NetCapture.pdf
File-Format: Application/pdf
File-Function: 
Number: WP2006-007
Classification-JEL: L41, O34
Keywords: 
Handle: RePEc:bos:wpaper:WP2006-007