Two-Firm Scenario

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Two Firms with Compatible Products

Note: in order to run the simulation referred to in this slide, go here, to the Java Applet version. You will be directed to download the latest version of the Java plug-in.

One of the basic results of "Network Externalities" is that firms that are part of the same network must have equal outputs in a Fulfilled Expectations Cournot Equilibrium. This is essentially due to the fact that the firms, by virtue of belonging to the same compatibility network, derive exactly the same advantage from its size in selling their products to the consumer.

We embed this result into our Equilibrium Calculator. In other words, the calculator will automatically equalize the outputs of firms that belong to a single network. A consequence is that under conditions of full compatibility, there is only one FECE - the fully symmetric one.

To the left, we've set up a scenario in which the two firms are joined in a compatibility network. This is represented by the blue line connecting the two. Press "Go" several times to see them converge to the only possible equilibrium - one where the outputs are equal. The exact outputs that result are 13.74 for each firm. Interestingly, the total output is two times 13.74, or 27.48, higher than that of a monopolist.

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