When Algorithms Inspire: Cooperative Commitment and Market Competition Under Network Externalities—Cournot Versus Bertrand

Abstract

Our paper explores how firms facing positive direct network externalities cooperate to shape customer expectations while safeguarding their competitive positions in quantity (Cournot) and price (Bertrand) competition. The results reveal that firms gravitate toward adopting a cooperative full non-commitment structure in scenarios where network externalities are weak. Their rationale lies in their inability to effectively counteract potential price reductions that could result from any form of commitment. When facing moderate network externalities within a Bertrand competition framework, the preference for cooperative full non-commitment persists, whereas, in Cournot competition, firms cooperatively opt for partial commitment. This choice aims to strike a delicate balance between stimulating demand expansion and mitigating significant price reduction, ultimately leading to a collusive outcome. Under strong network externalities, the cooperative partial commitment is chosen regardless of the competition mode, albeit with a lower commitment level observed in Bertrand competition. The paper's analysis notably emphasizes the convergence of Cournot, Bertrand, and collusive outcomes, especially when significant network externalities are at play. Strikingly, the model uncovers a commitment paradox in which the same full commitment structure can either promote aggressive competition under regulatory intervention or entrench monopoly power when adopted through collusion. This underscores the crucial necessity for robust regulatory oversight, particularly in the digital age, where algorithms play pivotal roles in shaping cooperative commitment strategies.