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Quality improvement and network externalities

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  • GABSZEWICZ, Jean J.
  • GARCIA, Filomena

Abstract

We analyse the optimal pricing choice of an incumbent firm that sells a good with network externalities and is threatened by the entry of a higher quality variant. In the framework of a vertical differentiation model, we find a necessary and sufficient condition under which quality improvement occurs as a result of this competition.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2005096.

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Date of creation: 00 Jan 2005
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Handle: RePEc:cor:louvco:2005096

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Keywords: vertical product differentiation; network externalities; quality improvement;

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  1. Joseph Farrell & Garth Saloner, 1985. "Installed Base and Compatibility With Implications for Product Preannouncements," Working papers 385, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
  3. Gabszewicz, J.J. & Pepall, L. & Thisse, J.F., 1992. "Sequential Entry with Brand Loyalty Caused by Consumer Learning-by-Using," Papiers d'Economie Mathématique et Applications 92-17, Université Panthéon-Sorbonne (Paris 1).
  4. 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.
  5. Anette Boom & Pio Baake, . "Vertical Product Differentiation, Network Externalities, and Compatibility Decisions," Papers 010, Departmental Working Papers.
  6. Shy, Oz, 1996. "Technology revolutions in the presence of network externalities," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 785-800, October.
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