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Differentiated networks: equilibrium and efficiency

Argenziano, Rossella (2008) 'Differentiated networks: equilibrium and efficiency.' The Rand Journal of Economics, 39 (3). pp. 747-769. ISSN 0741-6261

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We consider a model of price competition in a duopoly with product differentiation and network effects. In the efficient allocation, both networks are active and the firm with the highest expected quality has the largest market share. To characterize the equilibrium allocation, we derive necessary and sufficient conditions for uniqueness of the equilibrium of the coordination game played by consumers for given prices. The equilibrium allocation differs from the efficient one for two reasons. First, the equilibrium allocation of consumers to the networks is too balanced, because consumers fail to internalize network externalities. Second, if access to the networks is priced by strategic firms, then the product with the highest expected quality is also the most expensive. This further reduces the asymmetry between market shares and therefore social welfare.

Item Type: Article
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Economics, Department of
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 28 Jun 2012 21:09
Last Modified: 15 Jan 2022 00:20

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