Quality Competition and Market-Share Leadership in Network Industries

Cheng Yi-Ling () and Chan Ya-Yuan
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Cheng Yi-Ling: National Sun Yat-sen University, No. 70 Lienhai Rd., Kaohsiung, 80424, Taiwan, ROC
Chan Ya-Yuan: National Sun Yat-sen University, No. 70 Lienhai Rd., Kaohsiung, 80424, Taiwan, ROC

The B.E. Journal of Theoretical Economics, 2023, vol. 23, issue 1, 259-289

Abstract: This paper incorporates network externalities into a model of vertical product differentiation to examine how firms determine product quality and network size. We show that, with significant network benefits from quality improvement, the effects of network externalities differ depending on the type of competition. In response to an increase in network externalities, vertical product differentiation enlarges under price competition but shrinks under quantity competition. Moreover, under price competition, the network size of a high-quality product increases, whereas that of a low-quality product decreases for a sufficiently large extent of network externalities, resulting in a reversal in the leading position in terms of network size from the low- to the high-quality product. By contrast, the network sizes of high- and low-quality products both increase under quantity competition; moreover, the gap between their network sizes shrinks for a sufficiently large extent of network externalities.

Keywords: network externalities; intrinsic quality; vertical product differentiation; network size (search for similar items in EconPapers)
JEL-codes: D43 L13 L15 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1515/bejte-2020-0188

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