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Product Quality and Product Compatibility in Network Industries

Author

Listed:
  • Buccella Domenico

    (Department of Economics, Kozminski University, Jagiellońska Street, 57/59 – 03301, Warsaw, Poland)

  • Fanti Luciano

    (Department of Economics and Management, University of Pisa, Via Cosimo Ridolfi, 10, I-56124, Pisa, PI, Italy)

  • Gori Luca

    (Department of Law, University of Pisa, Via Collegio Ricci, 10, I-56126, Pisa, PI, Italy)

Abstract

Using an appropriate game-theoretic approach, this article develops a non-cooperative two-stage game in a Cournot duopolistic network industry in which firms strategically choose whether to produce compatible goods in the first decision-making stage. Quality differentiation affects the sub-game perfect Nash equilibrium (SPNE): (i) the network effect acts differently between low- and high-quality firms, depending on their compatibility choice; (ii) if the network externality is positive (resp. negative), to produce compatible (resp. incompatible) goods is the unique SPNE; however, this equilibrium configuration leads the high-quality firm to be worse off; (iii) there is room for a side payment from the high- to the low-quality firm to deviate toward incompatibility (resp. compatibility) under positive (resp. negative) network externality. This payment represents a Pareto improvement on the firm side but not from a societal perspective, as consumers would be worse off. The article also pinpoints the social welfare outcomes corresponding to the SPNE.

Suggested Citation

  • Buccella Domenico & Fanti Luciano & Gori Luca, 2024. "Product Quality and Product Compatibility in Network Industries," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 24(1), pages 299-339, January.
    • Handle: RePEc:bpj:bejtec:v:24:y:2024:i:1:p:299-339:n:10
    DOI: 10.1515/bejte-2023-0014
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    More about this item

    Keywords

    network externality; product compatibility; Cournot duopoly; quality differential;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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