The network origins of entry
Abstract: We develop a simple model of entry barriers under social learning via word-of-mouth (WOM). The Incumbent's product is known to the public, while success of a potential Entrant hinges on customers' awareness of a new product. We model WOM as percolation on random graphs. The market outcomes taxonomy depends on social network structure via two sufficient statistics. To explicitly characterize the domains of blockaded, deterred and accommodated entry, we focus on multinomial-logit (MNL) demand structure. As for welfare, the aggregate consumer surplus remains constant when the network is sparse, then increases with network density, and varies ambiguously when the network gets very dense.