Non-monotonic network effects and market entry

- Equilibrium firm entry may not be optimal in markets with product diversity.
- With competition in price, entry is always excessive.
- Entry remains excessive for goods with monotonic network effects.
- Entry can be excessive or insufficient when network effects are non-monotonic.

The simple circular model of horizontal product differentiation, in which firms compete in price, is characterized by excessive firm entry in equilibrium. When non-monotonic network effects are present, this result no longer holds. If consumers differ in their optimal number of other consumers choosing their same good, entry in equilibrium can be insufficient.