Vertical product differentiation and two-sided markets

We model platform competition in a market where products are characterized by cross network externalities. Consumers differ in their valuation of these externalities. Although the exogenous set-up is entirely symmetric, we show that platform competition induces a vertical differentiation structure that allows for the co-existence of asymmetric platforms in equilibrium. We establish this result in two set-ups: in the first one platforms commit to prices, in the second one they commit to network sizes.     

Price Competition and Consumer Externalities in a Vertically Differentiated Duopoly with Information Disparities

In this paper, we extend the model of vertical product differentiation to consider information disparities about quality differences and their effects on price competition. If uninformed consumers overestimate vertical differentiation, asymmetric information is a source of market power and informed consumers exert positive externalities on high quality product purchasers and negative externalities on low quality product purchasers. Such a result is consistent with the fact that information undermines brand. If uninformed consumers are skeptical, adverse selection issues arise and market demands may be perfectly inelastic to prices. With elastic demands equilibrium prices may be either distorted downwards or reflect real quality if the share of informed consumers is suffciently high. Therefore, with skeptical consumers firms may want either to signal quality or subsidize information provision.     

Price and Quantity Competition in a Differentiated Duopoly With Network Compatibility Effects

We consider the efficiency of price and quantity competition in a network products market, where we observe product compatibility with network externalities (hereafter, network compatibility effects). In particular, if network compatibility effects between firms are sufficiently asymmetric, the Cournot equilibrium is more efficient than the Bertrand equilibrium in terms of larger consumer, producer and total surpluses. Then, we consider an endogenous choice of the strategic variables, price and quantity. If the degree of network compatibility effects of the rival firm is larger (smaller) than the degree of product substitutability, then choosing prices (quantities) is a dominant strategy for the firm. Thus, if the network compatibility effects of both firms are larger (smaller), the Bertrand (Cournot) equilibrium arises. Furthermore, if the network compatibility effects between the firms are sufficiently asymmetric, the firm with a larger (smaller) network compatibility effect than a certain level of product substitutability chooses quantities (prices). In this case, the Cournot–Bertrand equilibrium arises, which is less (more) efficient than the Cournot equilibrium in terms of consumer (producer) surplus.     

Codetermination,Price Competition and the Network Industry

This research develops a tractable two‐stage non‐cooperative game with complete information describing the behaviour of price‐setting firms that must choose to be profit maximisers or bargainers under codetermination in a network industry with horizontal product differentiation. The existing theoretical literature has already shown that codetermination might arise as the endogenous market outcome in a strategic competitive quantity‐setting duopoly. In sharp contrast with this result, the present article shows that codetermination does never emerge as a Nash equilibrium in a price‐setting non‐network duopoly. Then, it aims at highlighting the role of network externalities in determining changes of paradigm of the game and letting codetermination become a sub‐game perfect Nash equilibrium when prices are strategic substitutes or strategic complements. This equilibrium may be Pareto efficient. Results allow distinguishing between mandatory codetermination and voluntary codetermination. The article also proposes a model of endogenous codetermination according to which every firm may choose to bargain with its own corresponding union bargaining unit only whether the firm's bargaining strength is exactly the profit‐maximising one. The equilibrium outcomes emerging in this case range from a uniform Nash equilibrium, in which both firms are codetermined, to mixed Nash equilibria, in which only one of them chooses to be codetermined. These results are ‘network depending’ and do not hold in a non‐network duopoly.     

On the role of network externalities in strategic delegation contracts with an industry-wide union

This article analyses the role of network externalities in managerial delegation contracts for differentiated products when the marginal product costs (the wage) are set by an industry-wide union. The results show that, in both Bertrand and Cournot equilibria, each owner offers a profit-oriented incentive scheme to his or her managers by penalizing sales maximization, irrespective of the strength of the network externalities. In the presence of weak network externalities and low product differentiation, firms can obtain higher profits in the equilibrium under Cournot-type quantity competition compared with that under Bertrand-type price competition. Furthermore, the wage chosen by the union is higher in the Cournot than in the Bertrand equilibrium. In the Cournot equilibrium, the wage increases with the strength of the network externalities. However, in the Bertrand equilibrium, there exists a threshold level of the degree of product differentiation.     

Competition with Congestible Networks

We analyse competition between two network providers when the quality of each network depends negatively on the number of customers connected to that network. With respect to price competition we provide a sufficient condition for the existence of a unique pure strategy Nash equilibrium. Comparative statics show that as the congestion effect gets stronger quantities will decrease and prices increase, under both Bertrand and Cournot competition. In an example with endogenous capacities it turns out that equilibrium capacities are at first increasing and then decreasing in the strength of congestion. Furthermore, capacities are higher under Cournot competition. Welfare comparisons between Bertrand and Cournot competition are unambiguous for fixed capacities, but may turn around for endogenous capacities.     

ENDOGENOUS TIMING IN QUALITY CHOICES AND PRICE COMPETITION

We modify the price‐setting version of the vertically differentiated duopoly model by Aoki (2003) by introducing an extended game in which firms noncooperatively choose the timing of moves at the quality stage. Our results show that there are multiple equilibria in pure strategies, whereby firms always select sequential play at the quality stage. We also investigate the mixed‐strategy equilibrium, revealing that the probability of generating outcomes out of equilibrium is higher than the probability of playing one Nash equilibria in pure strategies. In the alternative case with full market coverage, we show that the quality stage is solved in dominant strategies and therefore the choice of roles becomes irrelevant as the Nash and Stackelberg solutions coincide. With full market coverage and corner solution, the results show that the game has a unique subgame perfect equilibrium in pure strategies, where the high‐quality firm takes the lead in the quality stage.     

Transplants and Implants: The Economics of Self‐Improvement

This article examines equilibrium self‐improvement and marriage proposal strategies in a two‐sided search model with nontransferable utility. Singles are vertically differentiated—some make better marriage partners than others. A complete characterization of equilibrium is provided. It is shown there are two externalities to self‐improvement decisions. Further, these externalities may support multiple Pareto rankable equilibria. By encouraging everybody to self‐improve, society can create a situation where everybody is forced to improve to remain “acceptable.” But a preferred equilibrium may exist where there is less (costly) self‐improvement.     

Thematic Clubs and the Supremacy of Network Externalities

We explore the issue of minorities' survival in the presence of positive network externalities. We rely on a simple example of thematic clubs to illustrate why and how such survival problems might appear, first considering the case of simple‐network effects (fully anonymous externalities) and then the case of cross‐network effects (type‐dependent externalities). In both cases, the analysis is framed as a simple noncooperative game with a continuum of players and binary action sets. There is a unique and interior Nash equilibrium under mild network effects and two corner equilibria under strong network effects, with one club driven out. A utilitarian planner would accentuate the clustering effects of network externalities, and call for the disappearance of the minority club more often than the noncooperative solution. A simple myopic learning algorithm capturing the progression of network lock‐in effects is studied.     

Enforcing Domestic Quality Dominance through Quotas*

We study duopoly competition between a domestic and a foreign firm who first choose their quality and then compete in prices in the domestic market. As is well known, the free‐trade equilibrium exhibits quality differentiation and indeterminacy of the quality leader. We show that an import quota can enforce, as the unique subgame‐perfect equilibrium outcome, the quality ranking that favors the domestic producer and thereby can increase domestic welfare.     

WELFARE IMPLICATIONS OF THE INTERACTION BETWEEN HABITS AND CONSUMPTION EXTERNALITIES*

We analyze the welfare properties of the equilibrium path of a growth model where both habits and consumption externalities affect the utility of consumers. Our analysis highlights the crucial role played by complementarities between externalities and habits in order to generate an inefficient dynamic equilibrium. In particular, we show that the competitive equilibrium is inefficient when consumption externalities and habit‐adjusted consumption are not perfect substitutes.     

Price competition and quality differentiation with multiproduct firms

This paper examines a two-stage competition where firms simultaneously choose the number of products and qualities in the first stage, and then compete in prices. It is shown that a monopolist must sell a single product. In addition, in any equilibrium of multiproduct duopoly, there are segmented patterns of quality differentiation. Entangled configurations never emerge because each firm has an incentive to reduce the number of products facing direct competition with its rival. This result contrasts sharply with the equilibrium of non-segmented quality differentiation when firms compete in quantities. Furthermore, we find that the high-quality firm never offers more products than the low-quality firm, and quality differentiation between firms is greater than that within a firm.     

Network effects, market structure and industry performance

This paper analyzes oligopolistic markets with network externalities. Exploiting a minimal complementarity structure on the model primitives that allows for pure network goods, we prove existence of non-trivial fulfilled-expectations equilibrium. We formalize the concept of industry viability, investigate its determinants, and show that it improves with more firms in the market and/or by technological progress. These results enlighten some well-known conclusions from case studies in the management strategy literature. We also characterize the effects of market structure on industry performance, which depart substantially from ordinary markets. The approach relies on lattice-theoretic methods, supplemented with basic insights from nonsmooth analysis.     

Pricing dynamics and product quality: the case of antidepressant drugs

The rising prices of pharmaceuticals have generated considerable, and often acrimonious, debate. Yet, there is little conceptual work or empirical evidence on pharmaceutical pricing strategies or on the time paths of these prices. This study provides a conceptual framework describing the interplay between quality and product differentiation in determining the preferred pricing strategy. We hypothesize that higher quality products will engage in price skimming strategies in markets where products are sufficiently differentiated, but will choose a market penetration strategy in markets that are less differentiated. We apply an empirical analysis to brand name antidepressants during the years 1999–2002, a market where differences in quality are modest. A nationally representative data set on drug utilization and expenditures is combined with a physician survey on the quality attributes of drugs to examine the effect of drug quality on pharmaceutical pricing strategies. Results indicate that higher quality antidepressants engage in a market penetration strategy, charging initially lower prices that rise over time. At approximately 6–7 years post-entry, prices of the antidepressant drugs examined converge. Prices of higher quality antidepressants continue to increase thereafter, eventually becoming the highest priced drugs in the therapeutic class. These findings are consistent with a market in which product differentiation is modest and consumers learn which drug works best for them through experience.     

Price competition,free entry,and welfare in congested markets

In this paper we study the problem of price competition and free entry in congested markets. In particular, we consider a network with multiple origins and a common destination node, where each link is owned by a firm that sets prices in order to maximize profits, whereas users want to minimize the total cost they face, which is given by the congestion cost plus the prices set by firms. In this environment, we introduce the notion of Markovian Traffic Equilibrium to establish the existence and uniqueness of a pure strategy price equilibrium, without assuming that the demand functions are concave nor imposing particular functional forms for the latency functions. We derive explicit conditions to guarantee existence and uniqueness of equilibria. Given this existence and uniqueness result, we apply our framework to study entry decisions and welfare, and establish that in congested markets with free entry, the number of firms exceeds the social optimum.     

Choosing price or quantity? The role of delegation and network externalities

We consider a differentiated duopoly and endogenise the firm choice of the strategy variable (price or quantity) to play on the product market in the presence of network externalities. We model this choice by assuming both competition between entrepreneurial (owner-managed) firms and competition between managerial firms in which market decisions are delegated from owners to revenue-concerned managers. While network externalities are shown not to alter the symmetric equilibrium quantity choice arising in the no-delegation case, sufficiently strong network effects allow us to eliminate the multiplicity of equilibria under delegation and lead to a unique equilibrium in which both firms choose price.     

Interfirm Bundling and Vertical Product Differentiation

In this paper, we study the competitive effects of bundled discounts offered by pairs of independent firms. In a setting with vertically differentiated goods, where firms decide whether to participate in a discounting scheme before prices are set, it is shown that, in equilibrium, all pairs of firms producing goods of the same quality level offer bundled discounts. Relative to the no‐bundling benchmark, we find that (i) all headline prices rise, (ii) all bundle prices, net of the respective discount, decrease, and (iii) only high‐quality sellers will obtain higher profits. Furthermore, this equilibrium corresponds to the worst scenario in terms of consumer welfare, and it and decreases social welfare.     

Competition in telecommunication networks with call externalities

This paper describes a model involving two interconnected networks offering different degrees of quality. In these networks, there are call externalities enabling consumers to assess the quality of the calls they send and receive. Networks compete in two-part tariffs. Our aim is to show that the “profit neutrality” result no longer applies due to network asymmetry and call externalities. In the case of non reciprocal access charges, call externalities generate private incentives enabling each competitor to charge low access prices. This reduces the risk of tacit collusion as competitors are free to negotiate their access charges.      

Price competition in markets with customer testing: the captive customer effect

We introduce product differentiation into the analysis of price competition in markets where suppliers test customers in order to assess whether they will pay for received goods or services. We find that, if the degree of differentiation is sufficiently high, suppliers may improve the average probability that their clientele will pay by charging higher prices. This helps suppliers to sustain high prices in equilibrium. Moreover, endogenizing locations in product space, we demonstrate that the high price level can be implemented in a pure-strategy subgame-perfect equilibrium with a high degree of differentiation. This is in contrast to the original Hotelling model with linear travel costs where a pure-strategy subgame-perfect equilibrium fails to exist.     

Dynamic Externalities and Policy Coordination

The paper introduces trade into dynamic models with externalities and capital accumulation, and evaluates the efficiency of the Cournot–Nash equilibrium. It considers mixed economies characterized by a blend of strategic and nonstrategic sectors. Also, there are two sources of interdependence: the existence of production externalities and the endogenous determination of market prices. It is shown that policy coordination is not needed when preferences are the same. In this case, the production externalities are internalized, so that an inefficient solution becomes the efficient integrated world equilibrium due to trade.