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Intrinsic quality improvements and network externalities

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  • Jean J. Gabszewicz
  • Filomena Garcia

Abstract

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

Suggested Citation

  • Jean J. Gabszewicz & Filomena Garcia, 2007. "Intrinsic quality improvements and network externalities," International Journal of Economic Theory, The International Society for Economic Theory, vol. 3(4), pages 261-278, December.
    • Handle: RePEc:bla:ijethy:v:3:y:2007:i:4:p:261-278
    DOI: 10.1111/j.1742-7363.2007.00059.x
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    References listed on IDEAS

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    1. Gabszewicz, Jean & Pepall, Lynne & Thisse, Jacques-Francois, 1992. "Sequential Entry with Brand Loyalty Caused by Consumer Learning-by-Using," Journal of Industrial Economics, Wiley Blackwell, vol. 40(4), pages 397-416, December.
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    5. 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.
    6. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
    7. Makoto Yano & Fumio Dei, 2006. "Network externalities, discrete demand shifts, and submarginal‐cost pricing," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 39(2), pages 455-476, May.
    8. Shy, Oz, 1996. "Technology revolutions in the presence of network externalities," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 785-800, October.
    9. 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.
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    Cited by:

    1. Yi-Ling Cheng & Hsiang-Yun Huang, 2025. "Quality competition and product compatibility in network industries," Journal of Economics, Springer, vol. 145(1), pages 31-57, June.
    2. Zhao, Dan & Chen, Hongmin & Hong, Xianpei & Liu, Jingfang, 2014. "Technology licensing contracts with network effects," International Journal of Production Economics, Elsevier, vol. 158(C), pages 136-144.
    3. Montinaro, Marta & Scrimitore, Marcella, 2019. "Per unit and ad valorem royalties in a patent licensing game," MPRA Paper 96642, University Library of Munich, Germany.
    4. Montinaro, Marta & Pal, Rupayan & Scrimitore, Marcella, "undated". "Per Unit and Ad Valorem Royalties in a Patent Licensing Game," FACTS: Firms And Cities Towards Sustainability 307305, Fondazione Eni Enrico Mattei (FEEM) > FACTS: Firms And Cities Towards Sustainability.
    5. Garcia Filomena, 2013. "When Should a Monopolist Improve Quality in a Network Industry?," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 13(1), pages 381-414, September.
    6. Fei Yan & Hong-Zhuan Chen & Sahin Telli & Zhi-Chao Zhang, 2024. "Strategic Licensing Model Choice with Network Effects in a Dynamic Duopoly," Dynamic Games and Applications, Springer, vol. 14(3), pages 611-641, July.
    7. Lioudmila Savtchenko, 2010. "Foreign devaluation as a coordinating device of heterogeneous investors: A game‐theoretic analysis of financial contagion," International Journal of Economic Theory, The International Society for Economic Theory, vol. 6(2), pages 195-204, June.
    8. Filomena Garcia & Cecilia Vergari, 2016. "Revealing Incentives for Compatibility Provision in Vertically Differentiated Network Industries," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(3), pages 720-749, September.

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