Market structure in congestible markets

This paper analyses market structure of industries that are subject to both positive and negative network effects. The size of a firm determines the q uality of its product: when network effects are positive, a larger firm is of higher quality; when the effects are negative, a larger firm's product i s of lower quality. Consumers have heterogeneous preferences towards qualit y (firm size), and firms compete in prices. Equilibria are characterised: f or example, in any asymmetric equilibrium, it must be that congestion is no t too severe. One consequence of this feature is that an increase in the nu mber of firms in the industry can raise individual firms' profits. Two fact ors can bound the number of firms in a free-entry equilibrium without fixed costs: expectations, and the 'finiteness' property (Shaked and Sutton, Rev iew of Economic Studies 49 (1982) 3-13, Econometrica 51(5) (1983) 1469-1483 ) of price competition. (C) 2001 Elsevier Science B.V. AH rights reserved.