Price Competition and Compatibility in the Presence of Positive Demand Externalities
AbstractIn many cases, the benefit to a consumer of a product increases with the number of other users of the same product. These demand interdependencies are referred to in the literature as positive demand externalities or network externalities. This paper examines the dynamic pricing behaviors of an incumbent and a later entrant, with special attention to the impacts of demand externalities, compatibility, and competition on prices and profits. Defining market power as the ability to price above a competitor without losing market share, we show how demand externalities and installed base combine to confer market power. We model optimal pricing as a differential game with the optimal price trajectory established as Nash open-loop controls. For a duopoly durable goods market with strong demand externalities, the results show an increasing price trajectory can be optimal. As expected, a new entrant is better off if its products are compatible with those of the incumbent, especially when demand externalities are strong and the installed base of the incumbent is large. Less intuitively, the incumbent as well may be better off agreeing on common standards. The comparison of monopoly and duopoly shows that under strong demand externalities and a small installed base, the incumbent profits from compatible entry.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 41 (1995)
Issue (Month): 5 (May)
diffusion; new products; dynamic pricing; duopoly competition; network externalities; compatibility; standards;
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Mason, Robin, 2000. "Network externalities and the Coase conjecture," European Economic Review, Elsevier, vol. 44(10), pages 1981-1992, December.
- Argenton, C. & Prüfer, J., 2011.
"Search Engine Competition with Network Externalities,"
2011-024, Tilburg University, Tilburg Law and Economic Center.
- Argenton, C. & Prüfer, J., 2012. "Search engine competition with network externalities," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5117898, Tilburg University.
- Ting Zhu & Vishal Singh & Anthony Dukes, 2011. "Local competition, entry, and agglomeration," Quantitative Marketing and Economics, Springer, vol. 9(2), pages 129-154, June.
- Fabio Manenti & Ernesto Somma, 2008.
"One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries,"
International Journal of the Economics of Business,
Taylor & Francis Journals, vol. 15(3), pages 301-322.
- Fabio Maria Manenti & Ernesto Somma, 2002. "One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries," series 0004, Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari, revised Jan 2002.
- Fabio Maria Manenti & Ernesto Somma, 2008. "One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries," "Marco Fanno" Working Papers 0068, Dipartimento di Scienze Economiche "Marco Fanno".
- Fabio M. Manenti & Ernesto Somma, 2002. "One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries," Industrial Organization 0205001, EconWPA, revised 04 Oct 2002.
- Manenti, Fabio M. & Ernesto Somma, 2002. "One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries," Royal Economic Society Annual Conference 2002 136, Royal Economic Society.
- Alexei Parakhonyak & Nick Vikander, 2013.
"Optimal sales schemes for network goods,"
HSE Working papers
WP BRP 41/EC/2013, National Research University Higher School of Economics.
- José López-Sánchez & José Arroyo-Barrigüete & Domingo Ribeiro, 2008. "Development of a technological competition model in the presence of network effects from the modified law of Metcalfe," Service Business, Springer, vol. 2(2), pages 83-98, June.
- Ho-Chyuan Chen & Chien-Chen Chen, 2011. "Compatibility Under Differentiated Duopoly with Network Externalities," Journal of Industry, Competition and Trade, Springer, vol. 11(1), pages 43-55, March.
- Chen, Jing & Grewal, Ravneet, 2013. "Competing in a supply chain via full-refund and no-refund customer returns policies," International Journal of Production Economics, Elsevier, vol. 146(1), pages 246-258.
- Didier LAUSSEL & Ngo Van LONG & Joana RESENDE, 2014. "Network E¤ects, Aftermarkets and the Coase Conjecture : A Dynamic Markovian Approach," Cahiers de recherche 06-2014, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Narayanan, V.K. & Chen, Tianxu, 2012. "Research on technology standards: Accomplishment and challenges," Research Policy, Elsevier, vol. 41(8), pages 1375-1406.
- Sadou, Karim, 2002. "L’impact des externalités de réseau sur le processus de décision du consommateur," Economics Papers from University Paris Dauphine 123456789/5855, Paris Dauphine University.
- Lange, Rense & McDade, Sean & Oliva, Terence A., 2001. "Technological choice and network externalities: a catastrophe model analysis of firm software adoption for competing operating systems," Structural Change and Economic Dynamics, Elsevier, vol. 12(1), pages 29-57, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.