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AbstractWe explore the social efficiency of free entry in a pure network goods market where Cournot oligopolistic competition prevails and consumers have passive expectations. Focusing on network compatibility between firms, we consider the cases of two network systems: a firm‐specific system and a single industry‐wide network system. We demonstrate the following results. In the firm‐specific network system, the number of firms under free entry is socially excessive compared with the second‐best criteria. However, in the single industry‐wide network system, if the elasticity of network effects in relation to the expected network sizes is sufficiently large, the number of firms under free entry is socially insufficient compared with the second‐best criteria. Otherwise, socially excessive entry arises. We also examine the same issue in the case of a mixed network goods market.

Using a horizontally differentiated three‐firm model, we consider horizontal mergers and antitrust policy in a network products market, where network externalities and compatibilities between products and services are observed. In particular, we focus on the role of merger‐related network compatibility. That is, if the degree of the net degree of merger‐related network compatibility is larger than the degree of product substitutability, consumer surplus is higher than in the premerger case. In this case, the proposed merger is allowed by antitrust authorities based on a consumer welfare standard. Furthermore, relating to a merger externality on an outsider, we examine the American Online and Time Warner case.