Price competition in a differentiated products duopoly under network effects

We examine price competition under product-specific network effects, in a duopoly where the products are differentiated horizontally and vertically. When consumers’ expectations are not affected by prices, firms may share the market equally, or one firm (possibly even the low-quality one) may capture the entire market. When product qualities are different, we may also have interior asymmetric equilibria. With expectations affected by prices, firms’ competition becomes more intense and the high quality firm captures a larger market share. Under strong network effects, we characterize a continuum of equilibria and show that a range of prices may be sustained but the higher the prices the smaller the difference between them should be.