Product Differentiation in the Presence of Positive and Negative Network Effects
AbstractUsing two standard location models, we investigate price competition and divergence from optimal product differentiation when consumer preferences are influenced by the number of consumers purchasing the same brand or shopping at the same store. Negative network effects tend to lessen competition and increase prices whereas positive network effects (bandwagon effects) make competition fiercer and lead to lower prices. Furthermore, in the duopoly case, an increase in total population may adversly affect the clients of a store despite the fact that they benefit from price cuts. Finally, under free entry, increasing the population may lead to a reduction in the equilibrium number of stores and always increases the divergence between the equilibrium and optimal numbers of stores.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1306.
Date of creation: Dec 1995
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- Anette Boom & Pio Baake, .
"Vertical Product Differentiation, Network Externalities, and Compatibility Decisions,"
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- Baake, Pio & Boom, Anette, 2001. "Vertical product differentiation, network externalities, and compatibility decisions," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 267-284, January.
- Hend Ghazzai & Rim Lahmandi-Ayed, 2006.
"Vertical differentiation, network externalities and compatibility decisions : an alternative approach,"
Cahiers de la Maison des Sciences Economiques
b06013, Université Panthéon-Sorbonne (Paris 1).
- Griva, Krina & Vettas, Nikolaos, 2011. "Price competition in a differentiated products duopoly under network effects," Information Economics and Policy, Elsevier, vol. 23(1), pages 85-97, March.
- Di Cintio, Marco, 2007. "A note on the Hotelling principle of minimum differentiation: Imitation and crowd," Research in Economics, Elsevier, vol. 61(3), pages 122-129, September.
- Rainer Nitsche, 2002. "On the Effectiveness of Anit-Predation Rules," CIG Working Papers FS IV 02-12, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
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