CAPACITY EXPANSION IN MARKETS WITH INTER-TEMPORAL CONSUMPTION EXTERNALITIES

This paper analyses market capacity expansion in the presence of inter-temporal consumption externalities such as consumer learning, networks and bandwagon effects. An externality leads to an endogenous shift of market demand that responds to past market capacity. Whereas market capacity grows in waves, its magnitude depends on the degree of market concentration. The competitive environment contributes to S-shaped time patterns of market capacity expansion. On the other hand, using a low introductory price, a monopolist plans an initially larger amount of market cultivation than a competitive market capacity expansion. Copyright 2010 The Author. Journal compilation 2010 Blackwell Publishing Ltd/University of Adelaide and Flinders University.