Strategic Choice of Network Externality

Yuanzhu Lu () and Sougata Poddar ()

No 2015-03, Working Papers from Auckland University of Technology, Department of Economics

Abstract: In many product markets, impact of network externality plays an important role to affect the overall quality of a product. However, the degree or the strength of network externality is assumed as a parameter in most of the literature. We propose a model of vertical product differentiation with two competing firms where the strength of network externality is endogenized as a strategic choice of the high quality firm. We show how the equilibrium market structure and market coverage depend on the cost of choosing the network strength and on the relative quality difference of the competing products. We also show that the relationship between the optimal level of network externalities and the relative quality differences of the products can be monotonic or non-monotonic.

Keywords: Vertical product differentiation; Network externality; Market structure; Market coverage; Investment cost (search for similar items in EconPapers)
Pages: 26 pages
Date: 2015-03
New Economics Papers: this item is included in nep-com, nep-cse, nep-mic and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.aut.ac.nz/__data/assets/pdf_file/0011/ ... omics-WP-2015-03.pdf (application/pdf)

Related works:
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:aut:wpaper:201503

Access Statistics for this paper

More papers in Working Papers from Auckland University of Technology, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Gail Pacheco ().