Vertical product differentiation, network externalities, and compatibility decisions
AbstractWe analyse the subgame perfect equilibrium of a four stage game in a model of vertical product differentiation, where the consumer's evaluation of a product depends on its inherent quality and on its network's size. First, two firms choose their product's inherent quality. Then they may mutually agree on providing an adapter before competing in prices. Finally, consumers buy. We find that, despite the high quality firm's preference for incompatibility, an adapter is always provided in equilibrium. Social welfare is greater than without an adapter and can be improved by regulating compatibility only in those cases where qualities are differentiated too much.
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Bibliographic InfoArticle provided by Elsevier in its journal International Journal of Industrial Organization.
Volume (Year): 19 (2001)
Issue (Month): 1-2 (January)
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Web page: http://www.elsevier.com/locate/inca/505551
Other versions of this item:
- Anette Boom & Pio Baake, . "Vertical Product Differentiation, Network Externalities, and Compatibility Decisions," Papers 010, Departmental Working Papers.
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
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010, Departmental Working Papers.
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