Capacity Choice in a Price-Setting Mixed Duopoly with Network Effects

This paper explores the capacity choice for a public firm that is a welfare-maximizer and for a private firm that is a pure-profit-maximizer in the context of a price-setting mixed duopoly with a simple mechanism of network effects where the surplus that a firm’s client gets increases with the number of other clients of that firm. In this paper, we show that the public firm chooses over-capacity irrespective of the strength of network effects and the demand parameter, and that the difference between the output level and capacity level of the private firm strictly depends on the values of both the strength of network effects and the demand parameter. More precisely, the private firm chooses over-capacity when the strength of network effects is high relative to the demand parameter, while it chooses under-capacity otherwise.