Network externalities in a vertically differentiated luxury goods market

Di Wu, Ji Sun, Leonard F.S. Wang and Huizhong Liu

Mathematical Social Sciences, 2024, vol. 128, issue C, 100-109

Abstract: This study examines the impact of network externalities on the market performance of vertically differentiated luxury products. Luxury consumption triggers vanity-driven utility, which decreases due to the snob effect as market share expands. By employing a duopoly model under price competition, we demonstrate that a higher degree of network externalities enhances high-quality product market share, price, and profit while reducing those for low-quality products. The crowding-out of high-quality products on low-quality products becomes more pronounced as network externalities increase. We analyze the effects of quality improvement on equilibrium outcomes, revealing that a moderate reduction in the quality gap benefits social welfare. In contrast, a marginal gap leads to a lose-lose situation for firms. Our study underscores the importance of retaining low-quality products and adopting quality promotion strategies for high-quality products.

Keywords: Vertical product differentiation; Quality gap; Network externalities; Snob effect (search for similar items in EconPapers)
JEL-codes: D43 L13 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:matsoc:v:128:y:2024:i:c:p:100-109

DOI: 10.1016/j.mathsocsci.2024.02.001

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