Research On Network Externalities, Product Differentiation And Manufacturers’ Competition Decision-Making

Since the 1990s, along with the rapid development of information technology, computer network technology and network and economic integration, a new economic form has been formed, that is, the network economy. The rise of the Internet economy not only caused a significant change in the socio-economic structure, mode of production, consumption structure and the whole economic activities, it also had a significant impact on all aspects of production, operation and management of modern enterprises. More importantly, the further development of the network economy in the context of economic globalization might well change the basic business operation mode of modern enterprises, and shake the classic strategic thinking and effective management methods in the industrial age.In the background of the Internet economy rapid development, this paper explores competitive relationship and business decision choices between traditional manufacturers and network ones by bringing network externalities and product differentiation into a a framework system so as to provide the theoretical basis for the reference for healthy, orderly development of Chinese enterprises in the network economy.First of all, based on the analysis and summary of a large number of relevant literature, by combining the actual situation of the fierce competition and virtual reality integration between traditional manufacturers and network ones, the problems of competitive relationship and operational decision-making between the two have been analyzed, the focus of this study has been identified, the research ideas in this article have been identified, and the framework of this research has been designed.Then, the paper explores the market competition and business decision of traditional manufacturers and network ones when they are operating homogeneous products with network externalities. Unlike the previous literatures, which only discuss the product network externalities, this paper analyzes and explores the product network externalities, and the manufacturers’external characteristic parameters which stand for the product brand effect, the manufacturer’s goodwill, both of which are brought into an overall framework. We come to the following conclusions:in the case of the market completely being covered, if the competitors do not intend to participate in the competition in another market, both traditional manufacturers and network ones have no incentives into the other markets to participate in it, but when competitors make cross-market operating decisions, these two types of manufacturers will participate in the competition in another type of market;in the case of the market not completely being covered, no matter whether the competitors have the plan to participate in the cross-market competition or not, the traditional manufacturers or network ones are happy to make the cross-market business decision, to seek greater market share and profits. On this basis, the paper studies in depth the long-term evolution of the mode of competition games between traditional manufacturers and network ones in the inter-environment by using the tool of evolutionary games theory, so we get to know that no matter whether in the case of the market completely being covered or in the case of the market not completely being covered, as long as there is a type of manufacturers participating in the across-market operation, another type of manufacturers is also bound to participate in the cross-market operation. Thus, the results of the long-term evolution of the market will be traditional manufacturers and network ones will be operating simultaneously in the two markets.Secondly, on this basis, this paper constructs a product selection decision-making model which contains two competitors by using the analytical tools of differentiation theory and game theory in order to explore how the product differentiation between traditional manufacturers and network ones affects their business strategy choice and price competition. The results of this study show if the traditional manufacturers or network ones can not be differentiated on the product, which will reduce the opportunity to be differentiated in the market, and when the online population ratio and the network attribute utility are between the moderate range, both of the manufacturers can differentiate between product and market strategy.Thirdly, this paper explores the most suitable product portfolio strategy and market competition strategy of the traditional manufacturers or network ones when they sequently enter and launch two products at the same time by means of static analysis into a dynamic model. We found that after the manufacturers have launched two products at the same time, the market equilibrium will produce one or two cluster products phenomenon, the swarm behavior of the manufacturers makes the equilibrium solution of the two clusters is more likely to take place. In fact, new entrants into the manufacturers do not need to choose two products which are similar to the products launched in the market, but only need to select a product which is similar, because in this way can they also obtain the same market share. After the introduction of products with the vertical difference to analyze, we know that through the launch of the products with a vertical difference, they can obtain higher profits by separating the different income levels of consumers. At this time, different income distribution patterns are the main decision-making factors affecting the manufacturer’s pricing decision, when the consumers’ income distribution is allocated on average, the manufacturers will set the price of the high level of quality at the level which can automatically divide income level into two groups.Finally, we discuss the impact of the strength of the network externalities on competitive strategies of the two manufacturers in the cases of static game and dynamic game. The study found that if the products of two manufacturers produce different network effect, the one with higher network externalities can obtain a larger market share and higher product price. On the other hand, it also shows that even the network externality of some manufacturer is very small. It does not exist only a monopolist on the market.In carrying out the product static game analysis, we know that the greater gap of the network externalities between the two manufacturers is, the greater price gap of the two manufacturers equilibrium will be. When the product does not exist network externalities, both of them will have half of the market share, and the price of the product is the same. When the products’ network externalities of two manufacturers are the same, which will form the same market share with that of absence of network externalities; On the other hand, after the two manufacturers compete in Bertrand price, which makes the price lower than that of absence network externalities. When the products of the two manufacturers are not the same as those of its network externalities, the product price of the manufacturers with greater network externalities is higher than that of the manufacturers with smaller network externalities, and the proportion of the market share will be greater than 1. In carrying out the dynamic game analysis under the presence of network externalities, we know that when the product does not exist network externalities, the product price of the traditional manufacturers is higher than the that of the network ones, due to the high price, its market share is lower than that of the corresponding network manufacturers, the profits gained is less than the network manufacturers.In the case of the products of the two manufacturers have the same network externalities, there will also exist the product price of traditional manufacturers greater than that of the network ones, its market share is lower than that of the network ones, and its profits gained are less than those of the network ones; On the other hand, when the products of the two manufacturers both have the network externalities, the Bertrand price competition makes the product price lower than that of the absence of the network externalities. When the products of the two manufacturers have different network externalities, if the network externalities of traditional manufacturers are greater than those of the network ones, the product price of the traditional manufacturers will be higher than that of the network ones, while the proportion of the market share and profits will be less than those of the network vendors. Through Stackelberg and Nash equilibrium comparative analysis, we find that no matter whether network externalities exist or not, the market price, share and profit of the network manufacturers obtained in Stackelberg game are greater than their corresponding ones in the Nash equilibrium results; When network externalities exist, the market price obtained by traditional manufacturers is greater than its Nash equilibrium results,and its market share is slightly lower than its Nash equilibrium results, but taken together, the profits obtained by the traditional manufacturers are greater than the results in the Nash equilibrium.In the concluding part of this paper, we have summarized the main work and contributions, and predicted the limitations of this study and the direction of future work.