Network Externalities and the Overprovision of Quality by a Monopolist
We investigate the behavior of a monopolist supplying a vertically differentiated good with network externalities. Assuming a convex unit cost of quality improvements, we show that the presence of network externalities may yield oversupply of quality compared with the social optimum, when partial market coverage emerges at equilibrium. Overall, the incentive to expand output increases in the extent of network externalities, thereby partially counterbalancing the social damage produced by the quality distortion.
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Volume (Year): 67 (2001)
Issue (Month): 4 (April)
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