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Differentiated networks: equilibrium and efficiency

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Rossella Argenziano

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Abstract

We consider a model of price competition in a duopoly with product differentiation and network effects. In the efficient allocation, both networks are active and the firm with the highest expected quality has the largest market share. To characterize the equilibrium allocation, we derive necessary and sufficient conditions for uniqueness of the equilibrium of the coordination game played by consumers for given prices. The equilibrium allocation differs from the efficient one for two reasons. First, the equilibrium allocation of consumers to the networks is too balanced, because consumers fail to internalize network externalities. Second, if access to the networks is priced by strategic firms, then the product with the highest expected quality is also the most expensive. This further reduces the asymmetry between market shares and therefore social welfare. Copyright (c) 2008, RAND.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1756-2171.2008.00037.x
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Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 39 (2008)
Issue (Month): 3 ()
Pages: 747-769
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Handle: RePEc:bla:randje:v:39:y:2008:i:3:p:747-769

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September. [Downloadable!] (restricted)
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  3. Ui, Takashi, 2006. "Correlated quantal responses and equilibrium selection," Games and Economic Behavior, Elsevier, vol. 57(2), pages 361-369, November. [Downloadable!] (restricted)
  4. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January. [Downloadable!] (restricted)
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  5. Griva, Krina & Vettas, Nikolaos, 2004. "Price Competition in a Differentiated Products Duopoly Under Network Effects," CEPR Discussion Papers 4574, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. Matthew Mitchell & Andrzej Skrzypacz, 2006. "Network externalities and long-run market shares," Economic Theory, Springer, vol. 29(3), pages 621-648, November. [Downloadable!] (restricted)
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  7. Anderson, Simon P & de Palma, Andre, 2001. "Product Diversity in Asymmetric Oligopoly: Is the Quality of Consumer Goods Too Low?," Journal of Industrial Economics, Blackwell Publishing, vol. 49(2), pages 113-35, June. [Downloadable!] (restricted)
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  8. Stephen Morris & Hyun Song Shin, 2004. "Heterogeneity and Uniqueness in Interaction Games," Yale School of Management Working Papers ysm341, Yale School of Management. [Downloadable!]
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  9. Jullien, Bruno, 2008. "Price Skewness and Competition in Multi-Sided Markets," IDEI Working Papers 504, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  10. Farrell, Joseph & Saloner, Garth, 1986. "Standardization and variety," Economics Letters, Elsevier, vol. 20(1), pages 71-74. [Downloadable!] (restricted)
  11. Judd, Kenneth L., 1985. "The law of large numbers with a continuum of IID random variables," Journal of Economic Theory, Elsevier, vol. 35(1), pages 19-25, February. [Downloadable!] (restricted)
  12. Andre de Palma & Luc Leruth, 1989. "Equilibrium in Competing Networks with Differentiated Products," Discussion Papers 814, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  13. Chou, Chien-fu & Shy, Oz, 1990. "Network effects without network externalities," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 259-270, June. [Downloadable!] (restricted)
  14. Baake, Pio & Boom, Anette, 2001. "Vertical product differentiation, network externalities, and compatibility decisions," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 267-284, January. [Downloadable!] (restricted)
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  15. Rust, John, 1993. "GAUSS and MATLAB: A Comparison," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 307-24, July-Sept. [Downloadable!] (restricted)
  16. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, Elsevier. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Matthew Mitchell & Andrzej Skrzypacz, 2006. "Network externalities and long-run market shares," Economic Theory, Springer, vol. 29(3), pages 621-648, November. [Downloadable!] (restricted)
    Other versions:
  2. Sääskilahti, Pekka, 2006. "Buying Decision Coordination and Monopoly Pricing of Network Goods," MPRA Paper 5106, University Library of Munich, Germany. [Downloadable!]
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