NETWORK COMPETITION, PRODUCT QUALITY, AND MARKET COVERAGE IN THE PRESENCE OF NETWORK EXTERNALITIES

The model identifies the quality of a network product with the number of consumers using it. Hence the producer cannot unilaterally control the quality of his product. Using the preference specification of vertical quality differentiation, it is shown that the largest network produced will be the most expensive one and used by the richest consumers. Non-cooperative industry structures result in a larger market coverage than cooperative. If producers can enter the market freely, market coverage with non-compatible networks will be larger. However, if there is no free entry, market coverage is larger with a single industry-wide standard.