A note on compatibility and entry in a circular model of product differentiation
Consider an industry in which network goods are supplied by two horizontally differentiated firms facing the threat of a potential entrant. Firms' dilemma is between occupying the product space by selling very differentiated (incompatible) goods, and supplying compatible goods that offer higher utilities hence can be charged a higher price to consumers but are also closer substitutes. The compatibility-entry-price game is solved backward when firms and consumers are located on a circular product space. It turns out that strong externalities can favour entry, as merging the networks and accommodating entry can be preferred by the incumbents.
Volume (Year): 12 (2004)
Issue (Month): 1 ()
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- Chou, Chien-fu & Shy, Oz, 1996. "Do consumers gain or lose when more people buy the same brand," European Journal of Political Economy, Elsevier, vol. 12(2), pages 309-330, September.
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