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Compatibility Competition In The Presence Of Network Externalities

  • Kyoungwon Rhee

    ()

    (Department of Economics, Dongguk University)

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    A quality level is much often determined ahead of price. In imperfectly competitive markets, quality decisions are known to create the rival¡¯s price undercutting, and thus the equilibrium quality level becomes suboptimal. This paper takes a view that a quality level of a product subject to network externalities is positively related to its degree of compatibility to other brands as well as to the size of its own network. It shows that in the presence of network externalities, contrary to the literature, the suppliers tend to provide an excessive degree of compatibility because compatibility provision relaxes subsequent price competition.

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    Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

    Volume (Year): 32 (2007)
    Issue (Month): 1 (June)
    Pages: 147-161

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    Handle: RePEc:jed:journl:v:32:y:2007:i:1:p:147-161
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    1. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
    2. de Palma, Andre & Leruth, Luc & Regibeau, Pierre, 1999. "Partial compatibility with network externalities and double purchase," Information Economics and Policy, Elsevier, vol. 11(2), pages 209-227, July.
    3. Ching-to Albert Ma & James F. Burgess Jr., 1992. "Quality Competition, Welfare, and Regulation," Papers 0024, Boston University - Industry Studies Programme.
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