Competition in Markets with Quality Uncertainty and Network Effects

Reme Bjørn-Atle ()
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Reme Bjørn-Atle: Norwegian Institute of Public Health, Oslo, Norway

Review of Network Economics, 2019, vol. 18, issue 4, 205-242

Abstract: We study how quality uncertainty among consumers affects price competition in the presence of network effects. Our main result is that quality uncertainty has non-monotonic effects on firms’ price setting behavior. Prices and industry profit is first falling, then increasing, in quality uncertainty. In addition we show that quality uncertainty can force a high quality provider to be aggressive to the point where its price in the first period is below that of a low quality provider. We also analyse the incentives for compatibility under quality uncertainty, and find that when quality uncertainty is sufficiently high, compatibility may be used as a means of softening price competition.

Keywords: network effects; vertical differentiation; duopoly; compatibility (search for similar items in EconPapers)
JEL-codes: L13 L14 L15 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1515/rne-2019-0061

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