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

Author

Listed:
  • Nicolas Jonard

    () (CNRS, CREA, Ecole Polytechnique)

  • Eric Schenk

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

Abstract

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.

Suggested Citation

  • Nicolas Jonard & Eric Schenk, 2004. "A note on compatibility and entry in a circular model of product differentiation," Economics Bulletin, AccessEcon, vol. 12(1), pages 1-9.
  • Handle: RePEc:ebl:ecbull:eb-03l00001
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    File URL: http://www.accessecon.com/pubs/EB/2004/Volume12/EB-03L00001A.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Kohlberg, Elon & Novshek, William, 1982. "Equilibrium in a simple price-location model," Economics Letters, Elsevier, vol. 9(1), pages 7-15.
    3. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Ghazzai Hend & Lahmandi-Ayed Rim, 2009. "Vertical Differentiation, Social Networks and Compatibility Decisions," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-23, June.
    2. 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).

    More about this item

    Keywords

    compatibility;

    JEL classification:

    • L0 - Industrial Organization - - General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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