[SeminaireCREM] The Network Origins of Entry

The Network Origins of Entry co-écrit avec Arthur Campbell and Yves Zenou

We study how and when new firms enter the markets where fixed costs of entry are small (e.g. the market of smartphone apps). The key factor of a new firm's success is that potential customers become aware of the new product through the word of mouth (WOM). We use random network techniques and site-percolation analysis to study the role of network density in the market outcome. An informed consumer passes the information about the new product further iff she purchased that product herself. Hence, incumbent firms have room for strategic entry deterrence through simply reducing their prices, which leads to a shrinking number of informed consumers purchasing the new product. This may (or may not, depending on the communication network density) preclude the emergence of a ``giant component'' in a network of informed consumers, which is a necessary and sufficient condition of the entrant's positive market share. We find that a denser WOM network of customers facilitates entry but not necessarily leads to higher aggregate welfare.
To describe the WOM network and to sensibly define the very concept of network density suitable for our purpose, we work with a flexible non-parametric class of mixed Poisson degree distributions, which encompasses the standard parametric families of degree distributions used in the literature: Poisson, exponential, and (asymptotically) power.