Price and Quality Competition in a Vertically Differentiated Market with Network Effects

The aim of this study is to investigate how network effects affect the quality and price decisions of firms in a vertically differentiated market. As network effects increase, high-quality producers tend to raise quality while low-quality producers lower it. The degree of product differentiation is thus expanded. The price of high-quality products decreases first and then increases, but the price of low-quality product diminishes as network effects increase. Simultaneously, market demand and the market coverage rate expand. Profits and network effects are positively related. In addition, high-quality advantage still holds in the presence of network effects.