Product quality and product compatibility in network industries

Domenico Buccella, Luciano Fanti and Luca Gori ()

Discussion Papers from Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy

Abstract: Making use of an appropriate game-theoretic approach, this article develops a two-stage game in a Cournot duopoly in network industries, in which firms strategically choose whether to produce compatible goods. Quality differentiation significantly affects the sub-game perfect Nash equilibrium (SPNE) of the game: (i) the network effect acts differently between low- and high-quality firms depending on their compatibility choice; (ii) the unique SPNE is to produce compatible (resp. incompatible) goods if the network externality is positive (resp. negative); however, this equilibrium can be Pareto inefficient, and the high-quality firm is worse off; (iii) there is room for a side payment from the high- to the low-quality firm to deviate towards incompatibility (resp. compatibility) under positive (resp. negative) network externality. The social welfare outcomes corresponding to the SPNE are also pinpointed.

Keywords: Network externality; Product compatibility; Cournot duopoly; Quality differential (search for similar items in EconPapers)
JEL-codes: D4 L1 L2 (search for similar items in EconPapers)
Date: 2023-03-01
New Economics Papers: this item is included in nep-com, nep-gth, nep-ind and nep-mic
Note: ISSN 2039-1854
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Related works:
Journal Article: Product Quality and Product Compatibility in Network Industries (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:pie:dsedps:2023/291

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