Price Competition and Product Differentiation when Goods have Network Effects


Conrad, Klaus


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URL: https://ub-madoc.bib.uni-mannheim.de/999
URN: urn:nbn:de:bsz:180-madoc-9998
Document Type: Working paper
Year of publication: 2004
The title of a journal, publication series: Discussion Papers / Institut für Volkswirtschaftslehre und Statistik ; Department of Economics, Universität Mannheim
Volume: 612
Place of publication: Mannheim
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Institut für Volkswirtschaftslehre und Statistik > Discussion Papers
Subject: 330 Economics
Classification: JEL: L62 H23 Q38 L11 ,
Subject headings (SWD): Produktinnovation , Preiswettbewerb , Qualitätswettbewerb , Kraftfahrzeug
Abstract: The objective of our approach is to develop a model which captures horizontal product differentiation under environmental awareness, product innovation under network effects, and price competition whereby environmentally friendly products are costlier to produce. As an example, we refer to automobile producers, offering cars with a gasoline powered engine and one with a natural gas powered engine. The network of petrol stations provide the complementary good. The fulfilled expectation equilibrium could be one with either the firm offering the conventional engine as the only producer, or one with the firm offering the new technology as the only producer, or one where both firms share the market. Which equilibrium will emerge depends on the cost of producing energy efficient engines and on environmental awareness of the consumers. Due to the latter aspect the innovative firm has a chance to enter the market. We use a two stage game in prices and characteristics to analyse the respective market structure. We show that if environmental awareness is strong, the firm with the conventional technology will improve energy efficiency of its product. If the network effect is weak, both firms will be in the market. Prices and profits will decline if the role of the network effect becomes important.

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Conrad, Klaus (2004) Price Competition and Product Differentiation when Goods have Network Effects. Open Access Discussion Papers / Institut für Volkswirtschaftslehre und Statistik ; Department of Economics, Universität Mannheim Mannheim 612 [Working paper]
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