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Price Competition and Product Differentiation when Goods have Network Effects

Author

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  • Klaus CONRAD

    (University of Mannheim Department of Economics)

Abstract

The objective of our approach is to develop a model which captures horizontal product differentiation under environmental awareness, product innovation under network effects, and price competition whereby environmentally friendly products are costlier to produce. As an example, we refer to automobile producers, offering cars with a gasoline powered engine and one with a natural gas powered engine. The network of petrol stations provide the complementary good. The fulfilled expectation equilibrium could be either one with the firm offering the conventional engine as the only producer, one with the firm offering the new technology as the only producer, or one in which both firms share the market. Which equilibrium will emerge depends on the cost of producing energy efficient engines and on environmental awareness of the consumers. Due to the latter aspect the innovative firm has a chance to enter the market. We use a two stage game in prices and characteristics to analyse the respective market structure. We show that if environmental awareness is strong, the firm with the conventional technology will improve energy efficiency of its product. If the network effect is weak, both firms will be in the market. Prices and profits will decline if the role of the network effect becomes important. In order to find out whether private decision on the type of engine coincides with a socially optimal product differentiation, we determine the position of the two types of engine by a welfare maximizing authority.

Suggested Citation

  • Klaus CONRAD, 2005. "Price Competition and Product Differentiation when Goods have Network Effects," Industrial Organization 0502002, EconWPA.
  • Handle: RePEc:wpa:wuwpio:0502002
    Note: Type of Document - pdf; pages: 24
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    References listed on IDEAS

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    Cited by:

    1. van't Veld, Klaas & Kotchen, Matthew J., 2011. "Green clubs," Journal of Environmental Economics and Management, Elsevier, vol. 62(3), pages 309-322.
    2. repec:gam:jsusta:v:8:y:2016:i:4:p:365:d:68273 is not listed on IDEAS
    3. Zhao, Rui & Zhou, Xiao & Han, Jiaojie & Liu, Chengliang, 2016. "For the sustainable performance of the carbon reduction labeling policies under an evolutionary game simulation," Technological Forecasting and Social Change, Elsevier, vol. 112(C), pages 262-274.
    4. Sengupta, Aditi, 2015. "Competitive investment in clean technology and uninformed green consumers," Journal of Environmental Economics and Management, Elsevier, vol. 71(C), pages 125-141.
    5. Vasileiou, Efi & Georgantzís, Nikolaos, 2015. "An experiment on energy-saving competition with socially responsible consumers: Opening the black box," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 58(C), pages 1-10.
    6. Li, Yuanhao & van 't Veld, Klaas, 2015. "Green, greener, greenest: Eco-label gradation and competition," Journal of Environmental Economics and Management, Elsevier, vol. 72(C), pages 164-176.
    7. Simone D'Alessandro & Domenico Fanelli, 2015. "The Role of Income Distribution in the Diffusion of Corporate Social Responsibility," Metroeconomica, Wiley Blackwell, vol. 66(2), pages 187-212, May.
    8. repec:eee:reveco:v:51:y:2017:i:c:p:444-454 is not listed on IDEAS
    9. repec:gam:jsusta:v:8:y:2016:i:1:p:48:d:61811 is not listed on IDEAS
    10. Zhou, Wenhui & Huang, Weixiang, 2016. "Contract designs for energy-saving product development in a monopoly," European Journal of Operational Research, Elsevier, vol. 250(3), pages 902-913.
    11. Yi Zheng & Huchang Liao & Xue Yang, 2016. "Stochastic Pricing and Order Model with Transportation Mode Selection for Low-Carbon Retailers," Sustainability, MDPI, Open Access Journal, vol. 8(1), pages 1-19, January.
    12. Réquillart, Vincent & Soler, Louis-Georges & Zang, Yu, 2016. "Quality standards versus nutritional taxes: Health and welfare impacts with strategic firms," Journal of Health Economics, Elsevier, vol. 50(C), pages 268-285.
    13. repec:gam:jsusta:v:9:y:2017:i:5:p:835-:d:98832 is not listed on IDEAS
    14. Zhang, Linghong & Wang, Jingguo & You, Jianxin, 2015. "Consumer environmental awareness and channel coordination with two substitutable products," European Journal of Operational Research, Elsevier, vol. 241(1), pages 63-73.
    15. Mantovani, Andrea & Tarola, Ornella & Vergari, Cecilia, 2016. "Hedonic and environmental quality: A hybrid model of product differentiation," Resource and Energy Economics, Elsevier, vol. 45(C), pages 99-123.
    16. repec:eee:proeco:v:191:y:2017:i:c:p:74-84 is not listed on IDEAS
    17. Iosifidi, Maria, 2016. "Environmental awareness, consumption, and labor supply: Empirical evidence from household survey data," Ecological Economics, Elsevier, vol. 129(C), pages 1-11.
    18. Shizuka Nishikawa, 2015. "Regulating Cournot Oligopoly with Environmental Externalities," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 43(4), pages 449-462, December.
    19. repec:fan:mcmcmc:v:html10.3280/mc2017-001002 is not listed on IDEAS
    20. Fabrice Etilé & Sabrina Teyssier, 2012. "Signaling Corporate Social Responsibility: Third-Party Certification vs. Brands," PSE - Labex "OSE-Ouvrir la Science Economique" halshs-00736551, HAL.
    21. repec:gam:jsusta:v:8:y:2016:i:3:p:211:d:64715 is not listed on IDEAS
    22. Wang, Mingzheng & Liu, Junling & Chan, Hau-Ling & Choi, Tsan-Ming & Yue, Xiaohang, 2016. "Effects of carbon tariffs trading policy on duopoly market entry decisions and price competition: Insights from textile firms of developing countries," International Journal of Production Economics, Elsevier, vol. 181(PB), pages 470-484.

    More about this item

    Keywords

    Price competition; Quality competition; Environmental awareness; Network effects; Automobiles.;

    JEL classification:

    • L - Industrial Organization
    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
    • H - Public Economics
    • L - Industrial Organization

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