Positive Network Externalities and Negative Environmental Externalities in a Differentiated Duopoly With Entry Fee‐Refund Policy

ABSTRACT Most of the studies on the implications of externalities rarely consider the coexistence of positive network externalities and negative externalities. This paper examines the effect of net externalities in price competition and the effectiveness of the entry fee‐refund policy. We show that the positive network externalities improve profits, consumer surplus, and social welfare, while negative externalities reduce them. The implementation of an entry fee‐refund policy reduces firms' profits, but further improves consumer surplus and social welfare. An increase of positive network externalities makes such policy more effective, but the effect is weakened by negative externalities.