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Vertical product differentiation, network externalities, and compatibility decisions

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  • Baake, Pio
  • Boom, Anette

Abstract

We 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 Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 19 (2001)
Issue (Month): 1-2 (January)
Pages: 267-284

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Handle: RePEc:eee:indorg:v:19:y:2001:i:1-2:p:267-284

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Web page: http://www.elsevier.com/locate/inca/505551

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  1. Nicholas Economides & Fredrick Flyer, 1997. "Compatibility and Market Structure for Network Goods," Working Papers 98-02, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  4. Gabszewicz, Jean Jaskold & Thisse, Jacques-Francois, 1982. "Product Differentiation with Income Disparities: An Illustrative Model," Journal of Industrial Economics, Wiley Blackwell, vol. 31(1-2), pages 115-29, September.
  5. Navon, Ami & Shy, Oz & Thisse, Jacques-François, 1995. "Product Differentiation in the Presence of Positive and Negative Network Effects," CEPR Discussion Papers 1306, C.E.P.R. Discussion Papers.
  6. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Price competition, quality and income disparities," CORE Discussion Papers RP -370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September.
  8. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  9. Farrell, Joseph, 1989. "Converters, Compatibility, and the Control of Interfaces," Department of Economics, Working Paper Series qt8161p50b, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  10. de Palma, Andre & Leruth, Luc, 1996. "Variable willingness to pay for network externalities with strategic standardization decisions," European Journal of Political Economy, Elsevier, vol. 12(2), pages 235-251, September.
  11. Anette Boom & Pio Baake, . "Vertical Product Differentiation, Network Externalities, and Compatibility Decisions," Papers 010, Departmental Working Papers.
  12. Bental, Benjamin & Spiegel, Menahem, 1995. "Network Competition, Product Quality, and Market Coverage in the Presence of Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 43(2), pages 197-208, June.
  13. Belleflamme, Paul, 1998. "Adoption of network technologies in oligopolies," International Journal of Industrial Organization, Elsevier, vol. 16(4), pages 415-444, July.
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