The Study Of Product Differentiation And Compatibility Decisions Of Firms In Network Economy

Nowadays networks are a central issue. They connect individuals, communities, firms and structure the workings of society as a whole. Especially, in knowledge-intensive industries firms can use networks to optimize resources, response markets rapidly, share costs and realize technique innovations more efficiently. This is so-called "new economy" by Puffert and its most significant feature is network externality. Network externality, also called scale of economy of demands, means that the individual benefit from, and consequently individual willingness to pay for, consumption of the good (service) is increasing in the number of people consuming the same good (service) or a compatible one.The literatures on network externalities are more and more abundant and now most authors focus on investigating the compatible decisions between firms. In network economy network externalities and compatibility are the most two significant characteristics and affect firms' competitive strategies deeply. Meanwhile, the degree of compatibility between products is not a mere consequence of technological constraints, but is often a result of a firm's strategic consideration. With the network externalities, compatibility strategies bring two opposite effects: firms are eager to produce compatible goods for which consumers have a higher valuation. Meanwhile, choosing to be compatible is renouncing some product differentiation. Hence, some incumbent firms deter potential competitors to achieve compatibility by using protection of patents. At the same time new entry firms always want to be compatible with incumbent for the sake of exploiting the installed base to gain some market shares. It goes without saying that compatibility strategy is the most crucial strategy among firms' competitive strategies and product differentiation strategy has the closed relationship with it. Therefore, the deep investigation of the product differentiation and compatibility strategies of firms with the network externality not only are helpful for the traditional firm competitive theory and network externality theory, but also are meaningful for the firms to exploit all kinds of competitive strategies and government to make industry policies. Based on the previous research, the dissertation studies deeply the product differentiation and compatibility strategies of firms with the network externality under different market structure. Finally, we point out the future research fields. To these purpose, the theory of industrial organization, the game theory and information economics are employed.The main contents and results of the present paper are generalized as follows:First chapter is the introduction. Here we first introduce some related concepts, such as product differentiation, network externality and compatibility. After that, based on the previous research we point out some important problems, which will deeply investigate in present paper.In Chapter two we mainly study the strategies of compatibility of monopoly firm's up-grade products and welfare effects. Different to traditional vertical product differentiation model, we construct a new model, where the consumers' valuation about network externality will not be the same.From Chapter three to five we focus on consider the strategies of compatibility and product differentiation of incumbent and potential firms under the condition that the market structure is competitive.In Chapter three the strategies of compatibility of two incumbent firms, which are confronted with entry threaten, are studied with the horizontal differentiation. By employing a three stage game model we clearly give the answer.Based on the results obtained in Chapter three we in next Chapter study new entry firms' compatibility decisions in a horizontal differentiation model with network externalities. A critical point of compatibility decisions, which increases as the strength degree of network externalities decreases, is obtained. When the degree of compatibility is less than the critical point, the entry firm will not take compatibility decisions. Otherwise, the entry firm will chose compatibility decisions to enjoy the installed base of incumbent firm.On the assumption that the products have vertical differentiation the strategies of compatibility of potential entry firm are considered. For new entry firm the switching-cost and installed base of incumbent are the two market entry barriers. Thus, new entry firm would like to be compatibility with incumbent firm to use the competitor's network and decrease the consumers' switching-cost. However, for incumbent firm although he has the advantages of scale, he also would like to make compatibility with new entry firm because of its lower product quality in order not to be cancelled by market. In competitive equilibrium we find that network externality, switching-cost and the differences between products are the key factors to decide market power. In view of the reason that the switching-cost is decided by the degree of compatibility, the most key factors are network externality, the degree of compatibility and the differences between products.In last section we put forward the future research fields.The key innovations include:1 .The framework of the paper is very different to previous related literatures. Here we make the network externality, product differentiation and compatibility as a whole and under the same framework we study deeply the relationships among above three factors. Hence, our mathematical models and results are closed to real life.2.Many of results in the network externality research field obtained by different authors in the word are based on a special assumption, that is , the valuation of all consumers for network value are the same. Obviously, under this assumption the related results can not explain real life clearly. In present paper we rectify the assumption.3.Most of studies are concentrating on the product differentiation and compatibility strategies of the potential entry firms in stead of incumbent firms, especially for more than two incumbent firms. But this problem is very important. How do these incumbent firms choose product differentiation and compatibility strategies? The present paper studies the problem and gives some results.4.The degree of compatibility between products in our study is a continuum in stead of two extreme situations, which are full compatibility and full incompatibility. Furthermore, switching-cost is decided endogenously by degree of compatibility. Then we obtain the compatible critical point of new entry firm.