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Price and Quality Competition in a Vertically Differentiated Market with Network Effects

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  • Wei-Wei Lee

    (Department of Economics, National Dong-Hwa University, Taiwan)

  • Chien-Chieh Huang

    (Department of Economics, SooChow University, Taiwan)

  • Shu-Chin Tsai

    (Fu-bon Securities Co., Taiwan)

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    Abstract

    The aim of this study is to investigate how network effects affect the quality and price decisions of firms in a vertically differentiated market. As network effects increase, high-quality producers tend to raise quality while low-quality producers lower it. The degree of product differentiation is thus expanded. The price of high-quality products decreases first and then increases, but the price of low-quality product diminishes as network effects increase. Simultaneously, market demand and the market coverage rate expand. Profits and network effects are positively related. In addition, high-quality advantage still holds in the presence of network effects.

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    Bibliographic Info

    Article provided by College of Business, Feng Chia University, Taiwan in its journal Journal of Economics and Management.

    Volume (Year): 3 (2007)
    Issue (Month): 1 (January)
    Pages: 49-65

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    Handle: RePEc:jec:journl:v:3:y:2007:i:1:p:49-65

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    Related research

    Keywords: vertical product differentiation; quality competition; network effects;

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