Price Competition and Product Differentiation when Goods have Network Effects

Klaus Conrad

No 612, Discussion Papers from Institut fuer Volkswirtschaftslehre und Statistik, Abteilung fuer Volkswirtschaftslehre

Abstract: The objective of our approach is to develop a model which captures horizontal product differentiation under environmental awareness, product innovation under network effects, and price competition whereby environmentally friendly products are costlier to produce. As an example, we refer to automobile producers, offering cars with a gasoline powered engine and one with a natural gas powered engine. The network of petrol stations provide the complementary good. The fulfilled expectation equilibrium could be one with either the firm offering the conventional engine as the only producer, or one with the firm offering the new technology as the only producer, or one where both firms share the market. Which equilibrium will emerge depends on the cost of producing energy efficient engines and on environmental awareness of the consumers. Due to the latter aspect the innovative firm has a chance to enter the market. We use a two stage game in prices and characteristics to analyse the respective market structure. We show that if environmental awareness is strong, the firm with the conventional technology will improve energy efficiency of its product. If the network effect is weak, both firms will be in the market. Prices and profits will decline if the role of the network effect becomes important.

JEL-codes: H23 L11 L62 Q38 (search for similar items in EconPapers)
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://madoc.bib.uni-mannheim.de/999/1/612.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mnh:vpaper:999

Access Statistics for this paper

More papers in Discussion Papers from Institut fuer Volkswirtschaftslehre und Statistik, Abteilung fuer Volkswirtschaftslehre Contact information at EDIRC.
Bibliographic data for series maintained by Katharina Rautenberg ().