If you need an accessible version of this item please contact JSTOR User Support

Price Competition and Compatibility in the Presence of Positive Demand Externalities

Jinhong Xie and Marvin Sirbu
Management Science
Vol. 41, No. 5 (May, 1995), pp. 909-926
Published by: INFORMS
Stable URL: http://www.jstor.org/stable/2633106
Page Count: 18
  • Download PDF
  • Cite this Item

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

If you need an accessible version of this item please contact JSTOR User Support
Price Competition and Compatibility in the Presence of Positive Demand Externalities
Preview not available

Abstract

In many cases, the benefit to a consumer of a product increases with the number of other users of the same product. These demand interdependencies are referred to in the literature as positive demand externalities or network externalities. This paper examines the dynamic pricing behaviors of an incumbent and a later entrant, with special attention to the impacts of demand externalities, compatibility, and competition on prices and profits. Defining market power as the ability to price above a competitor without losing market share, we show how demand externalities and installed base combine to confer market power. We model optimal pricing as a differential game with the optimal price trajectory established as Nash open-loop controls. For a duopoly durable goods market with strong demand externalities, the results show an increasing price trajectory can be optimal. As expected, a new entrant is better off if its products are compatible with those of the incumbent, especially when demand externalities are strong and the installed base of the incumbent is large. Less intuitively, the incumbent as well may be better off agreeing on common standards. The comparison of monopoly and duopoly shows that under strong demand externalities and a small installed base, the incumbent profits from compatible entry.

Page Thumbnails

  • Thumbnail: Page 
909
    909
  • Thumbnail: Page 
910
    910
  • Thumbnail: Page 
911
    911
  • Thumbnail: Page 
912
    912
  • Thumbnail: Page 
913
    913
  • Thumbnail: Page 
914
    914
  • Thumbnail: Page 
915
    915
  • Thumbnail: Page 
916
    916
  • Thumbnail: Page 
917
    917
  • Thumbnail: Page 
918
    918
  • Thumbnail: Page 
919
    919
  • Thumbnail: Page 
920
    920
  • Thumbnail: Page 
921
    921
  • Thumbnail: Page 
922
    922
  • Thumbnail: Page 
923
    923
  • Thumbnail: Page 
924
    924
  • Thumbnail: Page 
925
    925
  • Thumbnail: Page 
926
    926