Marketing Strategies for Products with Cross-Market Network Externalities
This paper discusses marketing strategies for a manufacturer of a composite product (i.e., a product sold in two parts to two separate types of consumers, which has greater value when used jointly by both consumers). It is assumed that expected sales of one product increase a different type of consumer's willingness to pay for the other product. This is described as a 'cross-market network externality'. Using a parsimonious model, I characterize solutions for a monopolist and for variations on Bertrand-Nash competition with differentiated products. The results demonstrate that in the presence of the cross-market network externality, it is optimal for the price of one product to increase relative to the price of the other product (by comparison with expected prices in the absence of the externality effect). In competition between firms, it is individually rational for each firm to attempt to maximize its own cross-market network externality. However (and counter-intuitively), as all firms strive to increase the cross-market externality related to their products, a worse industry-wide solution results. In other words, the existence of firm-specific cross-market network externalities in Bertrand-Nash competition creates a form of 'Prisoner's Dilemma'. In some multi-firm competitive markets, compatibility between products is a design choice (for example, compatibility between word processors such as Microsoft Word and WordPerfect). Normally, increasing compatibility between products increases the substitutability of the products, often resulting in more competition and lower profits (absent other effects). In a market with cross-market externalities, however, increased compatibility leads to increased profits. The model utilized in this paper has applications to industries as diverse as television, Internet web portals and certain types of Internet browser software. It is expected that the predictions of the model will be tested on a data set from the software industry.
When requesting a correction, please mention this item's handle: RePEc:ysm:somwrk:ysm163. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.