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Compatibility Competition In The Presence Of Network Externalities

Author

Listed:
  • Kyoungwon Rhee

    (Department of Economics, Dongguk University)

Abstract

A quality level is much often determined ahead of price. In imperfectly competitive markets, quality decisions are known to create the rival¡¯s price undercutting, and thus the equilibrium quality level becomes suboptimal. This paper takes a view that a quality level of a product subject to network externalities is positively related to its degree of compatibility to other brands as well as to the size of its own network. It shows that in the presence of network externalities, contrary to the literature, the suppliers tend to provide an excessive degree of compatibility because compatibility provision relaxes subsequent price competition.

Suggested Citation

  • Kyoungwon Rhee, 2007. "Compatibility Competition In The Presence Of Network Externalities," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 32(1), pages 147-161, June.
    • Handle: RePEc:jed:journl:v:32:y:2007:i:1:p:147-161
    as

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    References listed on IDEAS

    as
    1. Ching-to Ma & James Burgess, 1993. "Quality competition, welfare, and regulation," Journal of Economics, Springer, vol. 58(2), pages 153-173, June.
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    6. de Palma, Andre & Leruth, Luc & Regibeau, Pierre, 1999. "Partial compatibility with network externalities and double purchase," Information Economics and Policy, Elsevier, vol. 11(2), pages 209-227, July.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Network Externalities; Relaxing Price Competition; Inefficiency of Compatibility Provision;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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