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Competition in Markets with Quality Uncertainty and Network Effects

Author

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  • Reme Bjørn-Atle

    (Norwegian Institute of Public Health, Oslo, Norway)

Abstract

We study how quality uncertainty among consumers affects price competition in the presence of network effects. Our main result is that quality uncertainty has non-monotonic effects on firms’ price setting behavior. Prices and industry profit is first falling, then increasing, in quality uncertainty. In addition we show that quality uncertainty can force a high quality provider to be aggressive to the point where its price in the first period is below that of a low quality provider. We also analyse the incentives for compatibility under quality uncertainty, and find that when quality uncertainty is sufficiently high, compatibility may be used as a means of softening price competition.

Suggested Citation

  • Reme Bjørn-Atle, 2019. "Competition in Markets with Quality Uncertainty and Network Effects," Review of Network Economics, De Gruyter, vol. 18(4), pages 205-242, December.
    • Handle: RePEc:bpj:rneart:v:18:y:2019:i:4:p:205-242:n:1
    DOI: 10.1515/rne-2019-0061
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    References listed on IDEAS

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    More about this item

    Keywords

    network effects; vertical differentiation; duopoly; compatibility;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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