When Should a Monopolist Improve Quality in a Network Industry?

Filomena Garcia

The B.E. Journal of Theoretical Economics, 2013, vol. 13, issue 1, 381-414

Abstract: This article identifies the necessary and sufficient conditions under which a monopolist, producing a network good, benefits from introducing a higher quality in the market. It is shown that, if the network externality is higher than the intrinsic quality differential, quality improvement is not optimal. Also, we obtain that, for low levels of the network effect, the monopolist prefers not to cover the market, whereas for higher levels, optimal prices are such that all consumers buy one of the two qualities. Finally, there is an introductory price strategy which is optimal for the good that benefits from network externalities.

Keywords: quality improvement; delayed network externalities; introductory pricing; innovation (search for similar items in EconPapers)
JEL-codes: D21 L11 L12 L15 O32 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1515/bejte-2013-0092

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