Abstract

This paper analyses the impact of consumption externalities on firms' cost raising Strategies. Two cases are considered: unilateral and reciprocal cost raising strategies. Following Economides (1996a), we show that the externality may have a pro-competitive role by inducing the firms to pursue an accomodating strategy. In addition, we show that when each firm can raise the cost of the rivals (reciprocal cost raising strategy), then the externality, when it is sufficiently strong, acts as a coordinating mechanism towards a Pareto superior outcome.