Vertical Product Di erentiation, Network Externalities, and Compatibility Decisions
نویسندگان
چکیده
We analyse the subgame perfect equilibrium of a four stage game in a model of vertical product di erentiation, where the consumer's evaluation of a product depends on its inherent quality and on its network's size. First, two rms choose their product's inherent quality. Then they may mutually agree on providing an adapter before competing in prices. Finally, consumers buy. We nd that, despite the high quality rm's preference for incompatibility, an adapter is always provided in equilibrium. Social welfare is greater than without an adapter and can be improved by regulating compatibility only in those cases where qualities are di erentiated too much. JEL classi cation: L13, L15, D43
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