A Study on Product Differentiation with Network Externality and Endogenous Production Costs

The horizontal differentiation of the production with network externality is analyzed by using a three stage game under the condition of endogenous production costs And product price,firm's profits,consumer surplus and social welfare are respectively compared with those obtained when production costs are exogenous.The results show that the product locations of duopolist are determined by the network externality parameter and the supplier's relative bargaining strength and the product's horizontal differentiation is effected only by the latter.The existence of supplier's Nash bargaining parameter increases product price and firm's profits,but decreases the consumer surplus and the social welfare.