Price and Quality Competition in a Vertically Differentiated Market with Network Effects

Wei-Wei Lee, Chien-Chieh Huang and Shu-Chin Tsai
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Wei-Wei Lee: Department of Economics, National Dong-Hwa University, Taiwan
Chien-Chieh Huang: Department of Economics, SooChow University, Taiwan
Shu-Chin Tsai: Fu-bon Securities Co., Taiwan

Journal of Economics and Management, 2007, vol. 3, issue 1, 49-65

Abstract: The aim of this study is to investigate how network effects affect the quality and price decisions of firms in a vertically differentiated market. As network effects increase, high-quality producers tend to raise quality while low-quality producers lower it. The degree of product differentiation is thus expanded. The price of high-quality products decreases first and then increases, but the price of low-quality product diminishes as network effects increase. Simultaneously, market demand and the market coverage rate expand. Profits and network effects are positively related. In addition, high-quality advantage still holds in the presence of network effects.

Keywords: vertical product differentiation; quality competition; network effects (search for similar items in EconPapers)
JEL-codes: D62 L11 L13 (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:jec:journl:v:3:y:2007:i:1:p:49-65

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