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Quality improvement and network externalities

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  • GABSZEWICZ, Jean J.
  • GARCIA, Filomena

Abstract

We analyse the optimal pricing choice of an incumbent firm that sells a good with network externalities and is threatened by the entry of a higher quality variant. In the framework of a vertical differentiation model, we find a necessary and sufficient condition under which quality improvement occurs as a result of this competition.

Suggested Citation

  • GABSZEWICZ, Jean J. & GARCIA, Filomena, 2005. "Quality improvement and network externalities," LIDAM Discussion Papers CORE 2005096, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2005096
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    References listed on IDEAS

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    1. Gabszewicz, Jean & Pepall, Lynne & Thisse, Jacques-Francois, 1992. "Sequential Entry with Brand Loyalty Caused by Consumer Learning-by-Using," Journal of Industrial Economics, Wiley Blackwell, vol. 40(4), pages 397-416, December.
    2. Farrell, Joseph & Saloner, Garth, 1986. "Installed Base and Compatibility: Innovation, Product Preannouncements, and Predation," American Economic Review, American Economic Association, vol. 76(5), pages 940-955, December.
    3. Baake, Pio & Boom, Anette, 2001. "Vertical product differentiation, network externalities, and compatibility decisions," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 267-284, January.
    4. Joseph Farrell & Garth Saloner, 1985. "Installed Base and Compatibility With Implications for Product Preannouncements," Working papers 385, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
    6. Shy, Oz, 1996. "Technology revolutions in the presence of network externalities," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 785-800, October.
    7. Bental, Benjamin & Spiegel, Menahem, 1995. "Network Competition, Product Quality, and Market Coverage in the Presence of Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 43(2), pages 197-208, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    vertical product differentiation; network externalities; quality improvement;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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