Bertrand Competition in Markets with Network Effects and Switching Costs

We analyze market dynamics under Bertrand duopoly competition in industries with network eects and consumer switching costs. Consumers form installed bases, repeatedly buy the products, and dier with respect to their switching costs. Depending on the ratio of switching costs to network eects, our model generates convergence to monopoly as well as market sharing as equilibrium outcomes. Convergence can be monotone or alternating in both scenarios. A critical mass eect, where consumers are trapped into one technology for sure only occurs for intermediate values of switching costs, whereas for large switching costs market sharing is the unique equilibrium and for small switching costs both monopoly and market sharing equilibria emerge. We also analyze stationary and stable equilibria, where we show that a monopoly outcome is almost inevitable, if switching costs or network eects increase over time. Finally, we examine …rms'incentives to make their products compatible and to create additional switching costs.