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Price and Quality Competition in a Vertically Differentiated Market with Network Effects


  • Wei-Wei Lee

    (Department of Economics, National Dong-Hwa University, Taiwan)

  • Chien-Chieh Huang

    (Department of Economics, SooChow University, Taiwan)

  • Shu-Chin Tsai

    (Fu-bon Securities Co., Taiwan)


The aim of this study is to investigate how network effects affect the quality and price decisions of firms in a vertically differentiated market. As network effects increase, high-quality producers tend to raise quality while low-quality producers lower it. The degree of product differentiation is thus expanded. The price of high-quality products decreases first and then increases, but the price of low-quality product diminishes as network effects increase. Simultaneously, market demand and the market coverage rate expand. Profits and network effects are positively related. In addition, high-quality advantage still holds in the presence of network effects.

Suggested Citation

  • Wei-Wei Lee & Chien-Chieh Huang & Shu-Chin Tsai, 2007. "Price and Quality Competition in a Vertically Differentiated Market with Network Effects," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 3(1), pages 49-65, January.
  • Handle: RePEc:jec:journl:v:3:y:2007:i:1:p:49-65

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    References listed on IDEAS

    1. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
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    More about this item


    vertical product differentiation; quality competition; network effects;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets


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