Competition in wearable device market: the effect of network externality and product compatibility

Jing Wu (), He Li, Zhangxi Lin and Haichao Zheng
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Jing Wu: Southwestern University of Finance and Economics
He Li: University of Memphis
Zhangxi Lin: Texas Tech University
Haichao Zheng: Southwestern University of Finance and Economics

Electronic Commerce Research, 2017, vol. 17, issue 3, No 1, 335-359

Abstract: Abstract The rapid growth in consumer adoption of wearable devices has garnered the attention of both practitioners and academia. Competition in the wearable device market is both substantial and complicated. In this study, we investigate the impact of network externality on wearable device competition in a two-dimensional product differentiation model. We consider a market that has a broad array of products (horizontal differentiation) and various quality levels (vertical differentiation). We study two types of network externalities according to the product compatibility in two types of market structures. Our model indicates that firm profits are decreased by network externalities in horizontal dominance. Network externality also increases (decreases) the higher-quality (lower-quality) firm’s profit in vertical dominance. Moreover, firms should ensure that their products are incompatible with those of rivals when network externality is large, and they should release compatible products when network externality is small in horizontal dominance. Firms should always ensure that their products are compatible with those of competitors in vertical dominance.

Keywords: Wearable device; Horizontal differentiation; Vertical differentiation; Network externality; Product compatibility (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10660-016-9227-6

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