Vertical Product Differentiation, Network Externalities, and Compatibility Decisions

Anette Boom and Pio Baake

Departmental Working Papers

Abstract: We analyse the subgame perfect equilibrium of a four stage game in a model of vertical product differentiation, where the consumer's evaluation of a product depends on its inherent quality and on its network's size. First, two firms choose their product's inherent quality. Then they may mutually agree on providing an adapter before competing in prices. Finally, consumers buy. We find that, despite the high quality firm's preference for incompatibility, an adapter is always provided in equilibrium. Social welfare is greater than without an adapter and can be improved by regulating compatibility only in those cases where qualities are differentiated too much.

JEL-codes: D43 L13 L15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-net and nep-reg
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Citations: View citations in EconPapers (25)

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Journal Article: Vertical product differentiation, network externalities, and compatibility decisions (2001)
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