Sequential product positioning on a platform in the presence of network effects

Abstract

We analyze in a game-theoretic framework the sequential product positioning problem of two asymmetric firms with different quality levels on a platform when network effects present, where the negative influences of product differentiation on product compatibility are explicitly considered. We obtain closed-form solutions to the positioning problem, and reveal that whether the traditional wisdom of positioning in the mass market is still optimal for the leader in our setting depends not only on whether it has a quality advantage over the follower, but also on the intensity of the network effects. For the follower, as the network effects increase or its quality advantage increases, its product positioning approaches the mass product; otherwise, the opposite is true. We also observe that the optimal degree of differentiation has certain robustness with respect to the order of the positioning decisions. In addition, we find that the degree of product differentiation in the sequential positioning scenario is lower than in the simultaneous positioning scenario, while it is higher than in the social welfare maximization scenario. This research provides concrete guidelines for high-tech firms to make pertinent strategic decisions, and lays a foundation for platform managers to design policies to coordinate its members.