Network Effects and Incentive to Attract Competition

Abstract

In this paper, we study the incumbent's incentives to share its es-sential facility when there exist network eects. We show that withoutnetwork eects, the incumbent will charge the access fee high enoughto deter the entrant. With network eects, however, the incumbent al-ways has an incentive to attract competition. We also show that if thepotential entrant has to pay the entry costs, then the incumbent hasan incentive to subsidize the entrant with a low access charge. Whenthe network eects become large, the incumbent is willing to lower theaccess fee to the marginal cost.