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Price and Quantity Competition in a Differentiated Duopoly With Network Compatibility Effects

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  • Tsuyoshi Toshimitsu

    (Kwansei Gakuin University)

Abstract

We consider the efficiency of price and quantity competition in a network products market, where we observe product compatibility with network externalities (hereafter, network compatibility effects). In particular, if network compatibility effects between firms are sufficiently asymmetric, the Cournot equilibrium is more efficient than the Bertrand equilibrium in terms of larger consumer, producer and total surpluses. Then, we consider an endogenous choice of the strategic variables, price and quantity. If the degree of network compatibility effects of the rival firm is larger (smaller) than the degree of product substitutability, then choosing prices (quantities) is a dominant strategy for the firm. Thus, if the network compatibility effects of both firms are larger (smaller), the Bertrand (Cournot) equilibrium arises. Furthermore, if the network compatibility effects between the firms are sufficiently asymmetric, the firm with a larger (smaller) network compatibility effect than a certain level of product substitutability chooses quantities (prices). In this case, the Cournot–Bertrand equilibrium arises, which is less (more) efficient than the Cournot equilibrium in terms of consumer (producer) surplus.

Suggested Citation

  • Tsuyoshi Toshimitsu, 2016. "Price and Quantity Competition in a Differentiated Duopoly With Network Compatibility Effects," The Japanese Economic Review, Springer, vol. 67(4), pages 495-512, December.
    • Handle: RePEc:spr:jecrev:v:67:y:2016:i:4:d:10.1111_jere.12109
    DOI: 10.1111/jere.12109
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    Cited by:

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    3. Tsuyoshi Toshimitsu, 2017. "Strategic Trade Policy and Network Compatibility," Journal of Industry, Competition and Trade, Springer, vol. 17(2), pages 237-249, June.
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    6. Kangsik Choi & Seonyoung Lim, 2023. "Input Price Discrimination in Endogenous Competition Mode," The Japanese Economic Review, Springer, vol. 74(2), pages 301-330, April.

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    More about this item

    Keywords

    L13; L32; L33;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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