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Price competition in a differentiated products duopoly under network effects

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  • Griva, Krina
  • Vettas, Nikolaos

Abstract

We examine price competition under product-specific network effects, in a duopoly where the products are differentiated both horizontally and vertically. We emphasize the role of consumers' expectations formation. When expectations are not influenced by prices, the market may be shared but shares must be equal unless product qualities differ or one firm, possibly even the low-quality one, may capture the entire market. When expectations are influenced by prices, which would be the case when there is commitment, competition becomes more intense and the high-quality firm tends to capture a larger market share. Under strong network effects there is a continuum of equilibria and the higher the prices, the smaller the difference between those prices can be. Requiring continuity of expectations, however, delivers a unique equilibrium where one firm captures the entire market.

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  • Griva, Krina & Vettas, Nikolaos, 2011. "Price competition in a differentiated products duopoly under network effects," Information Economics and Policy, Elsevier, vol. 23(1), pages 85-97, March.
  • Handle: RePEc:eee:iepoli:v:23:y:2011:i:1:p:85-97
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    Citations

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    Cited by:

    1. Jonas Häckner & Astri Muren, 2015. "Counterfeiting and Negative Consumption Externalities – A Closer Look," Journal of Industry, Competition and Trade, Springer, vol. 15(4), pages 337-350, December.
    2. Doganoglu, Toker & Wright, Julian, 2006. "Multihoming and compatibility," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 45-67, January.
    3. Alexei Alexandrov, 2008. "Interconnecting Differentiated Networks," Working Papers 08-07, NET Institute, revised Oct 2008.
    4. Laussel, Didier & Van Long, Ngo & Resende, Joana, 2015. "Network effects, aftermarkets and the Coase conjecture: A dynamic Markovian approach," International Journal of Industrial Organization, Elsevier, vol. 41(C), pages 84-96.
    5. Vitor Miguel Ribeiro & João Correia-da-Silva & Joana Resende, 2016. "Nesting Vertical And Horizontal Differentiation In Two-Sided Markets," Bulletin of Economic Research, Wiley Blackwell, vol. 68(S1), pages 133-145, December.
    6. Hagiu, Andrei & Hałaburda, Hanna, 2014. "Information and two-sided platform profits," International Journal of Industrial Organization, Elsevier, vol. 34(C), pages 25-35.
    7. Konstantinos Serfes & Eleftherios Zacharias, 2009. "Location Decisions of Competing Platforms," Working Papers 09-18, NET Institute, revised Aug 2009.
    8. Sjaak Hurkens & Angel L. Lopez, 2010. "Mobile Termination, Network Externalities, and Consumer Expectations," Working Papers 441, Barcelona Graduate School of Economics.
    9. Rossella Argenziano, 2008. "Differentiated networks: equilibrium and efficiency," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 747-769.
    10. Griva, Krina & Vettas, Nikolaos, 2011. "Price competition in a differentiated products duopoly under network effects," Information Economics and Policy, Elsevier, vol. 23(1), pages 85-97, March.
    11. Laussel, Didier & Resende, Joana, 2014. "Dynamic price competition in aftermarkets with network effects," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 106-118.
    12. Alfredo Garcia & Yue Sun & Joseph Shen, 2014. "Dynamic Platform Competition with Malicious Users," Dynamic Games and Applications, Springer, vol. 4(3), pages 290-308, September.
    13. Navarro, Noemí, 2012. "Price and quality decisions under network effects," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 263-270.
    14. Rabah Amir & Jean Gabszewicz & Joana Resende, 2014. "Thematic Clubs and the Supremacy of Network Externalities," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(5), pages 706-729, October.
    15. Schneider, Lorenz, 2014. "Firm value in emerging network industries," Information Economics and Policy, Elsevier, vol. 26(C), pages 75-87.
    16. Gaston Llanes & Andrea Mantovani & Francisco Ruiz-Aliseda, 2016. "Entry into complementary good markets with network effects," Working Papers 16-12, NET Institute.
    17. Alexei Alexandrov, 2015. "Anti-Competitive Interconnection: the effects of the elasticity of consumers' expectations and the shape of the network effects function," Journal of Industrial Economics, Wiley Blackwell, vol. 63(1), pages 74-99, March.
    18. Vitor Miguel Ribeiro, 2014. "Establishing a link between behavior ecconomics and two-sided markets," FEP Working Papers 538, Universidade do Porto, Faculdade de Economia do Porto.
    19. Azamat Valei, 2017. "Informative Advertising in a Monopoly with Network Externalities," CERGE-EI Working Papers wp596, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

    More about this item

    Keywords

    Network effects Expectations Product variety Quality Price competition;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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