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Quality Strategies in Network Markets

Author

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  • Lester T. Chan

    (School of Economics & Gregory and Paula Chow Center for Economic Research, Xiamen University, Xiamen, Fujian 361005, China)

Abstract

This paper studies network market problems in which firm(s)/platform(s) sets quality in addition to price. A well-established result in the network economics literature is that a profit-maximizing firm concerns only how quality is valued by the marginal consumer but not by inframarginal consumers, aka the Spence effect/distortion. For markets with strong network effects under which multiple market-tipping equilibria exist, I show that the validity of the previous result depends on the choice of the equilibrium selection criterion. Precisely, I show that all criteria commonly used in this literature give rise to the Spence effect, whereas the well-justified risk dominance criterion in game theory and its generalizations do not. Novel quality strategies are derived based on the latter criteria.

Suggested Citation

  • Lester T. Chan, 2024. "Quality Strategies in Network Markets," Management Science, INFORMS, vol. 70(3), pages 1992-2002, March.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:3:p:1992-2002
    DOI: 10.1287/mnsc.2023.4792
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