Network externalities in a quantity-setting vertically differentiated luxury goods market

Abstract This study reconsiders how the strength of network externalities and the gap in product quality influence equilibrium market outcomes in a luxury market with vertical product differentiation under quantity competition. We show the following three results. First, the demand, price, and profit of a low-quality firm can be positively associated with the strength of network externalities. Second, the profit-enhancing quality of a low-quality firm is higher under quantity competition than under price competition. Third, the profit-maximizing quality of a low-quality firm is higher than its socially optimal quality. JEL classification: D43; L13