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When Should a Monopolist Improve Quality in a Network Industry?

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  • Garcia Filomena

    (Indiana University, Department of Economics, Bloomington US University of Lisbon, ISEG\School of Economics and Management, Lisbon, Portugal, UECE – Research unit on complexity and economics, Lisbon, Portugal)

Abstract

This article identifies the necessary and sufficient conditions under which a monopolist, producing a network good, benefits from introducing a higher quality in the market. It is shown that, if the network externality is higher than the intrinsic quality differential, quality improvement is not optimal. Also, we obtain that, for low levels of the network effect, the monopolist prefers not to cover the market, whereas for higher levels, optimal prices are such that all consumers buy one of the two qualities. Finally, there is an introductory price strategy which is optimal for the good that benefits from network externalities.

Suggested Citation

  • Garcia Filomena, 2013. "When Should a Monopolist Improve Quality in a Network Industry?," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 13(1), pages 1-34, September.
    • Handle: RePEc:bpj:bejtec:v:13:y:2013:i:1:p:34:n:16
    DOI: 10.1515/bejte-2013-0092
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    References listed on IDEAS

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