Quality Strategies in Network Markets

Lester T. Chan ()
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Lester T. Chan: School of Economics & Gregory and Paula Chow Center for Economic Research, Xiamen University, Xiamen, Fujian 361005, China

Management Science, 2024, vol. 70, issue 3, 1992-2002

Abstract: This paper studies network market problems in which firm(s)/platform(s) sets quality in addition to price. A well-established result in the network economics literature is that a profit-maximizing firm concerns only how quality is valued by the marginal consumer but not by inframarginal consumers, aka the Spence effect/distortion. For markets with strong network effects under which multiple market-tipping equilibria exist, I show that the validity of the previous result depends on the choice of the equilibrium selection criterion. Precisely, I show that all criteria commonly used in this literature give rise to the Spence effect, whereas the well-justified risk dominance criterion in game theory and its generalizations do not. Novel quality strategies are derived based on the latter criteria.

Keywords: quality strategy; network market; Spence effect; risk dominance; equilibrium selection (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:3:p:1992-2002

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