Price Competition and Product Differentiation when Goods have Network Effects

Klaus Conrad

German Economic Review, 2006, vol. 7, issue 3, 339-361

Abstract: Abstract. The objective of our approach is to develop a model that captures horizontal product differentiation under environmental awareness with 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 provides the complementary good. We use a two‐stage game in prices and characteristics to analyse the market structure. In order to find out whether a private decision on the type of engine coincides with a socially optimal product differentiation, we determine the position of the two types of engine by a welfare‐maximizing authority.

Date: 2006
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German Economic Review is currently edited by Bernhard Felderer, Joseph F. Francois, Ivo Welch, Urs Schweizer and David E. Wildasin

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