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A note on compatibility and entry in a circular model of product differentiation

  • Nicolas Jonard

    ()

    (CNRS, CREA, Ecole Polytechnique)

  • Eric Schenk

    ()

    (LRPS, INSA Strasbourg and BETA, Universite Louis Pasteur)

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.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 12 (2004)
Issue (Month): 1 ()
Pages: 1-9

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Handle: RePEc:ebl:ecbull:eb-03l00001
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  1. Kohlberg, Elon & Novshek, William, 1982. "Equilibrium in a simple price-location model," Economics Letters, Elsevier, vol. 9(1), pages 7-15.
  2. B. Curtis Eaton & Myrna Holtz Wooders, 1985. "Sophisticated Entry in a Model of Spatial Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 282-297, Summer.
  3. 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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