Product Quality and Product Compatibility in Network Industries

Domenico Buccella, Luciano Fanti and Luca Gori ()

The B.E. Journal of Theoretical Economics, 2024, vol. 24, issue 1, 299-339

Abstract: Using an appropriate game-theoretic approach, this article develops a non-cooperative two-stage game in a Cournot duopolistic network industry in which firms strategically choose whether to produce compatible goods in the first decision-making stage. Quality differentiation affects the sub-game perfect Nash equilibrium (SPNE): (i) the network effect acts differently between low- and high-quality firms, depending on their compatibility choice; (ii) if the network externality is positive (resp. negative), to produce compatible (resp. incompatible) goods is the unique SPNE; however, this equilibrium configuration leads the high-quality firm to be worse off; (iii) there is room for a side payment from the high- to the low-quality firm to deviate toward incompatibility (resp. compatibility) under positive (resp. negative) network externality. This payment represents a Pareto improvement on the firm side but not from a societal perspective, as consumers would be worse off. The article also pinpoints the social welfare outcomes corresponding to the SPNE.

Keywords: network externality; product compatibility; Cournot duopoly; quality differential (search for similar items in EconPapers)
JEL-codes: D4 L1 L2 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1515/bejte-2023-0014 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
Working Paper: Product quality and product compatibility in network industries (2023)
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:bpj:bejtec:v:24:y:2024:i:1:p:299-339:n:10

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/bejte/html

DOI: 10.1515/bejte-2023-0014

Access Statistics for this article

The B.E. Journal of Theoretical Economics is currently edited by Burkhard C. Schipper

More articles in The B.E. Journal of Theoretical Economics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().