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When Should a Monopolist Improve Quality in a Network Industry?

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  • Garcia Filomena

    (Indiana University, Department of Economics, Bloomington US University of Lisbon, ISEG\School of Economics and Management, Lisbon, Portugal, UECE – Research unit on complexity and economics, Lisbon, Portugal)

Abstract

This article identifies the necessary and sufficient conditions under which a monopolist, producing a network good, benefits from introducing a higher quality in the market. It is shown that, if the network externality is higher than the intrinsic quality differential, quality improvement is not optimal. Also, we obtain that, for low levels of the network effect, the monopolist prefers not to cover the market, whereas for higher levels, optimal prices are such that all consumers buy one of the two qualities. Finally, there is an introductory price strategy which is optimal for the good that benefits from network externalities.

Suggested Citation

  • Garcia Filomena, 2013. "When Should a Monopolist Improve Quality in a Network Industry?," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 13(1), pages 381-414, September.
    • Handle: RePEc:bpj:bejtec:v:13:y:2013:i:1:p:34:n:16
    DOI: 10.1515/bejte-2013-0092
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    References listed on IDEAS

    as
    1. Gabszewicz, Jean J. & Garcia, Filomena, 2008. "A note on expanding networks and monopoly pricing," Economics Letters, Elsevier, vol. 98(1), pages 9-15, January.
    2. Jean J. Gabszewicz & Filomena Garcia, 2007. "Intrinsic quality improvements and network externalities," International Journal of Economic Theory, The International Society for Economic Theory, vol. 3(4), pages 261-278, December.
    3. Constantatos, Christos & Perrakis, Stylianos, 1997. "Vertical differentiation: Entry and market coverage with multiproduct firms," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 81-103, November.
    4. Baake, Pio & Boom, Anette, 2001. "Vertical product differentiation, network externalities, and compatibility decisions," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 267-284, January.
    5. Gabszewicz Jean & Garcia Filomena, 2007. "Optimal Monopoly Price Paths with Expanding Networks," Review of Network Economics, De Gruyter, vol. 6(1), pages 1-8, March.
    6. Luca Lambertini & Raimondello Orsini, 2010. "R&D for Quality Improvement and Network Externalities," Networks and Spatial Economics, Springer, vol. 10(1), pages 113-124, March.
    7. Bental, Benjamin & Spiegel, Menahem, 1995. "Network Competition, Product Quality, and Market Coverage in the Presence of Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 43(2), pages 197-208, June.
    8. L. Lambertini & R. Orsini, 1998. "Monopoly, Quality, and Network Externalities," Working Papers 334, Dipartimento Scienze Economiche, Universita' di Bologna.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    quality improvement; delayed network externalities; introductory pricing; innovation;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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