A Study On Compatibility Strategy Of Network Products Based On Horizontal Differentiation

The network economy which based on computer networks and communication technology has brought great change to the life style of human-being and the operation model of society. The most important feature of the network economy is network externality. For the firm in the network economy, product differentiation strategy is one of the important strategies to win the market competition. At the same time, achieving compatibility between products has a different significance for competitors at different market status. In this dissertation, we try to make good use of network economics, basic principle of game theory and the Hotelling Model, do some research in the compatibility decision-making of network product based on horizontal differentiation.First of all, we build a game model of two firms' competition, focus on considering the strategies of compatibility between the incumbent and potential firm under the condition that horizontal product differentiation exists. When products are incompatible with each other, the existence of network externality enlarges the market competition. When the intensity of network externality is large enough, equilibrium results will be the same as the case of perfect competition, firms can not reap super profits by differential positioning. When products are compatible with each other, the existence of network externality protects the status of incumbent firm. The product price of the incumbent firm is higher than the price of entry firm and the incumbent will gain higher profits. And the entry firm should make low-price strategy to survive in the market.Secondly, we build a game model of three firms' competition, focus on considering the strategies of compatibility between the two incumbent firms under the condition that product horizontal differentiation and the threat of potential firm all exist. Research shows that when the market entry of potential firm does not happen, the best strategy for both of the incumbent firms is fully compatibility. When the market entry of potential firm happened, then the best strategy for both of the incumbent firms is fully incompatibility. And during the market which has the characteristic of network externality, the potential firm tends to enter the market where the incumbent firms take the strategy of products incompatibility.The innovation may mainly reflect in the following three points:Firstly, the transport unit cost is endogenlized as one and is introduced to the assumption of the expansion Hotelling model. This change solves the problem of best positioning decision-making for network products. It analyzes the product compatibility strategy in the competition, makes a supplementary to the original theory.Secondly, this dissertation premises the assumption deficiency of the existing research: consumers have consistent preference to the externality of different networks. The paper introduces consumer's different evaluation to the network utility to the research.Thirdly, this dissertation considers the competition situation that the two incumbent firms face the entry threat of potential firm, analyzes the product compatibility strategy between the two incumbent firms and improves the existing theoretical results.