| In this dissertation, I examine the interplay of economic incentives for investments (e.g., increased capacity, quality ) in the context of a network structure. In the first part of the dissertation, I focus on resource adequacy in electricity markets. This refers to the ability of markets to induce appropriate levels of capacity additions when existing capacity depreciates and/or demand grows randomly over time. I use a dynamic oligopoly model with a stochastically growing demand to analyze the inherent tension between market-based incentives for capacity expansion in the long run and the firms' short- term profitability, which is determined by the aggregate level of installed capacity. Results indicate that the market fails to induce the socially optimal level of capacity. However, the magnitude of this failure varies greatly with the entry costs and the relative profitability of investments in the market (as measured by the ratio of maximum markup to production and investment costs).;In the second part of the dissertation, I analyze the provision of software security by developers in a market environment that features both positive and negative network externalities. Positive network externalities, which have been studied widely in the literature, are typically used to ex- plain high levels of market concentration. However, when a software product becomes dominant, it is also likely to experience increased levels of vulnerability exploitation. Therefore, there is the potential for a negative network externality in the form of increased security risks for the users. In this dissertation, I develop a continuous-time dynamic model, where firms constantly compete for a fraction of customers who revisit their choices at a constant rate. Based on the model, the outcome of market structure is determined by the relative strength of positive versus negative net- work externalities. When the marginal cost of security investment increases in the network size, an asymmetric market structure is not sustainable in the long run. During the transient states from asymmetric market structure to long-term equilibrium, the incumbent provides a lower level of security than the entrant. While the marginal cost is independent of the network size, the asymmetric market structure can be maintained. |
