THE EXISTENCE OF EQUILIBRIUM IN A DIFFERENTIATED DUOPOLY WITH NETWORK EXTERNALITIES*

Luca Lambertini () and Raimondello Orsini ()

The Japanese Economic Review, 2005, vol. 56, issue 1, 55-66

Abstract: The existence of a pure‐strategy subgame‐perfect equilibrium in qualities and prices is investigated in a duopoly model of vertical differentiation where quality improvements require a quadratic variable cost and network externalities operate. We show that there exists a parameter region where the incentive to predate at the quality stage prevents firms from reaching a pure‐strategy non‐cooperative equilibrium with prices above marginal costs. If network externalities are sufficiently large, a Bertrand equilibrium with zero profits may arise, although the amount of product differentiation is strictly positive.

Date: 2005
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https://doi.org/10.1111/j.1468-5876.2005.00300.x

Related works:
Working Paper: Existence of Equilibrium in A Differentiated Duopoly With Network Externalities (1998)
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