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Strategic Choice of Network Externality

Author

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  • Yuanzhu Lu

    (China Economics and Management Academy, Central University of Finance and Economics, Beijing, China)

  • Sougata Poddar

    (Department of Economics, Faculty of Business and Law, Auckland University of Technology)

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.

Suggested Citation

  • Yuanzhu Lu & Sougata Poddar, 2015. "Strategic Choice of Network Externality," Working Papers 2015-03, Auckland University of Technology, Department of Economics.
    • Handle: RePEc:aut:wpaper:201503
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Vertical product differentiation; Network externality; Market structure; Market coverage; Investment cost;
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