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Differentiated networks: equilibrium and efficiency
Author(s) -
Argenziano Rossella
Publication year - 2008
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.1756-2171.2008.00037.x
Subject(s) - duopoly , microeconomics , uniqueness , product differentiation , economics , product (mathematics) , network effect , nash equilibrium , competition (biology) , externality , quality (philosophy) , markov perfect equilibrium , symmetric equilibrium , welfare , market share , equilibrium selection , game theory , cournot competition , repeated game , market economy , mathematical analysis , ecology , philosophy , geometry , mathematics , epistemology , finance , biology
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.