Dynamic Analysis of the Effect of Network Externality in Vertically Differentiated Market Hyung-Rae Cho․Minho Rhee † Dept. of Industrial Systems Engineering/ERI, Gyeongsang National University

조형래(Hyung-Rae Cho):이민호(Minho Rhee) 한국산업경영시스템학회 2019 한국산업경영시스템학회지 Vol.42 No.2

Network externalities are essentially dynamic in that the value consumers feel about a product is affected by the size of the existing customer base that uses that product. However, existing studies on network externalities analyzed the effects of network externalities in a static way, not dynamic. In this study, unlike previous studies, the impact of network externalities on price competition in a vertically differentiated market is dynamically analyzed. To this end, a two-period duopoly game model was used to reflect the dynamic aspects of network externalities. Based on the game model, the Nash equilibria for price, sales volume, and revenue were derived and numerically analyzed. The results can be summarized as follows. First, if high-end product has strong market power, the high-end product vendor takes almost all benefits of the network externality. Second, when high-end product has strong market power, the low-end product will take over most of the initial sales volume increase. Third, when market power of high-end product is not strong, it can be seen that the effects of network externalities on the high and low-end products are generally proportional to the difference in quality. Lastly, if there exists a strong network externality, it is shown that the presence of low-end product can be more profitable for high-end product vendor. In other words, high-end product vendor has incentive to disclose some technologies for the market entrance of low-end product, even if it has exclusive rights to the technologies. In that case, however, it is shown that the difference in quality should be maintained significantly.

수직적으로 차별화된 시장 하에서 망외부성이 미치는 영향에 대한 동태적 분석

조형래,이민호,Cho, Hyung-Rae,Rhee, Minho 한국산업경영시스템학회 2019 한국산업경영시스템학회지 Vol.42 No.2

Network externalities are essentially dynamic in that the value consumers feel about a product is affected by the size of the existing customer base that uses that product. However, existing studies on network externalities analyzed the effects of network externalities in a static way, not dynamic. In this study, unlike previous studies, the impact of network externalities on price competition in a vertically differentiated market is dynamically analyzed. To this end, a two-period duopoly game model was used to reflect the dynamic aspects of network externalities. Based on the game model, the Nash equilibria for price, sales volume, and revenue were derived and numerically analyzed. The results can be summarized as follows. First, if high-end product has strong market power, the high-end product vendor takes almost all benefits of the network externality. Second, when high-end product has strong market power, the low-end product will take over most of the initial sales volume increase. Third, when market power of high-end product is not strong, it can be seen that the effects of network externalities on the high and low-end products are generally proportional to the difference in quality. Lastly, if there exists a strong network externality, it is shown that the presence of low-end product can be more profitable for high-end product vendor. In other words, high-end product vendor has incentive to disclose some technologies for the market entrance of low-end product, even if it has exclusive rights to the technologies. In that case, however, it is shown that the difference in quality should be maintained significantly.

망외부성이 존재하고 수직적으로 차별화된 제품 간의 호환성 전략 분석

조형래(Hyung-Rae Cho),이민호(Minho Rhee) 한국산업경영시스템학회 2020 한국산업경영시스템학회지 Vol.43 No.1

It is a general phenomenon for manufacturers to provide vertically differentiated product line for more profit through improved market coverage. For such manufacturers, the compatibility between vertically differentiated products is an important decision issue. Some manufacturers provide full compatibility between high and low version products, whereas some provide only downward compatibility for the purpose of recommending high version product. In this study, the two representative compatibility strategies, full or downward, between vertically differentiated products produced by a single manufacturer are analyzed, especially under network externality and in the viewpoint of profit maximization. To do this we used a market model which captures the basic essence of vertical differentiation and network externality. Based on the proposed market model, the profit maximizing solutions are derived and numerically analyzed. The results can be summarized as follows : (1) Regardless of compatibility strategy, under network externality, vertical differentiation is always advantageous in terms of profit. (2) The full compatibility strategy is shown to be the most advantageous in terms of profit. In addition, it is necessary to make quality difference between differentiated products as wide as possible to maximize profit. (3) To gradually drive low version product out of the market and shift the weight pendulum of market to high version product, it is shown that the downward compatibility strategy is essential. Unlike intuition, however, it is also shown that in order to drive low version product out of market, it is necessary to raise the quality of the low version product rather than to lower it.

제조업체와 복수의 유통업체 간의 다자간 협상전략 분석

조형래(Hyung-Rae Cho),이민호(Minho Rhee) 한국SCM학회 2022 한국SCM학회지 Vol.22 No.1

Recently, distribution companies have shown market dominance that has grown so much that they have comparative advantage in negotiating delivery prices with manufacturers in some items. Considering the ever-growing market dominance of distribution companies, the question of how manufacturers should negotiate delivery prices with distribution companies is considered one of the important decisions made by manufacturers. In this paper, we study the bargaining strategy of a manufacturer who sells a product through multiple distribution companies with a difference in distribution market dominance and bargaining power with the corresponding manufacturer. To do this, we derive and analyze the equilibrium solutions for both simultaneous and sequential bargaining games. The result can be summarized as follows: (1) For the manufacturer, it is more advantageous to conclude delivery negotiations with both distribution companies than to sign a supply contract with a specific distributor and abandon the rest; (2) If there is a difference in control of the distribution market between distribution companies, it is disadvantageous to manufacturers, but it works in favor of distributors.; (3) Simultaneous negotiation method has always been found to be advantageous to manufacturers profits over sequential negotiation method; (4) If the manufactrure has to negotiate sequentially, the order of negotiations has a significant impact on manufacturer’s profit.

후속시장의 경쟁 정도가 가격 전략에 미치는 영향 분석

조형래(Hyung-Rae Cho),이민호(Minho Rhee) 한국SCM학회 2023 한국SCM학회지 Vol.23 No.1

게임이론을 이용한 자체브랜드 제품의 가격 및 품질전략 분석

조형래(Hyung-Rae Cho),이민호(Minho Rhee) 한국산업경영시스템학회 2011 한국산업경영시스템학회지 Vol.34 No.3

Recently, the increasing power of distributors has given them the opportunity of introducing private brand (PB) products. Based on the game theory, this study analyzes the decision making of a distributor regarding the optimal pricing and quality strategies for the PB product. By analyzing the game model, it is shown that the pricing mechanism heavily depends not only on the market power of the distributor but on the quality of the PB product. It is also shown that, counter intuitively, as the market power of the distributor increases, the optimal quality of the PB product should be decreased.

게임이론을 이용한 자체브랜드 제품의 가격 및 품질전략 분석

조형래(Hyung-Rae Cho),이민호(Minho Rhee) 한국산업경영시스템학회 2011 한국산업경영시스템학회 학술대회 Vol.2011 No.-

Recently, the increasing power of distributors has given them the opportunity of introducing private brand (PB) products. Based on the game theory, this study analyzes the decision making of a distributor regarding the optimal pricing and quality strategies for the PB product. By analyzing the game model, it is shown that the pricing mechanism heavily depends not only on the market power of the distributor but on the quality of the PB product. It is also shown that, counter intuitively, as the market power of the distributor increases, the optimal quality of the PB product should be decreased.

Effect of Network Externality on the Price Competition in Vertically Differentiated Market

조형래(Hyung-Rae Cho),이민호(Minho Rhee) 한국산업경영시스템학회 2021 한국산업경영시스템학회지 Vol.44 No.1

The information products dramatically reduce the production costs of vertically differentiated products. Information products are also more likely to be affected by network externalities. Thus the proliferation of digital products is increasing the interests in network externality and vertical product differentiation. In step with this trend, the impact of network externalities on price competition in vertically differentiated markets has been continuously studied. Existing studies related to this topic have assumed that network externalities increase consumers willingness to pay per unit quality. The results show that higher quality products are affected more by network externality. However, network externality is essentially a concept affected by the size of the consumer, not a concept associated with quality. In this work, unlike previous studies, we present a new market model that reflects the essential definition of network externality. Based on the proposed market model, we derive both simultaneous and sequential Nash equilibria and analyze them numerically. The main results obtained from the analysis can be summarized as follows. First, network externalities primarily increase the demand for low-quality products and have a secondary impact on the demand for high-quality products. Second, the larger the quality difference between products, the more profitable they are. It also has been shown that sequential pricing methods are more advantageous in terms of revenue than simultaneous pricing method.

후속시장이 가격결정에 미치는 영향 분석

조형래(Hyung-Rae Cho),이민호(Minho Rhee) 한국산업경영시스템학회 2020 한국산업경영시스템학회지 Vol.43 No.3

Aftermarket refers to a market in which a company sells complementary goods, replacements of parts, and upgrade or maintenance services to consumers after selling them main durable goods. Intuitively, consumers who purchase main durable goods become major potential customers in subsequent aftermarket. Thus the existence of the aftermarket has a significant impact on pricing of the main durable goods as well as the aftermarket products. In this study, we analyze the effect of aftermarket on the pricing strategy for a company selling both main durable goods and aftermarket products. To do this we first divided the market into markets where the aftermarket products are indispensable and optional. Based on the proposed market types, the profit maximizing solutions are derived using two-period model, and the impacts of consumers’ undervaluation of aftermarket product prices on pricing strategy are analyzed. The results can be summarized as follows : (1) Regardless of the market type, the total profits were found to be inversely proportional to the consumer’s awareness accuracy of product prices in the aftermarket. This is in line with marketing efforts that sales companies have made intuitively to make consumers underestimate the cost of the aftermarket. (2) If aftermarket product is indispensable, only revenue from the aftermarket is sought. On the other hand, if aftermarket product is optional, revenue from the main durable good as well as the aftermarket product will be sought simultaneously. (3) Moreover, when aftermarket product is optional, the lower the awareness accuracy of consumers, the higher the price and profit of the main durable goods, while the lower the price and profit of the aftermarket products. This is contrary to the intuition that the lower the consumer s valuation of the costs of aftermarket, the more advantageous it would be to rely on aftermarket products rather than on main durable goods.

Analysis of Marketing Channel Competition under Network Externality

Hyung-Rae Cho(조형래),Minho Rhee(이민호),Sang-Gyu Lim(임상규) 한국산업경영시스템학회 2017 한국산업경영시스템학회지 Vol.40 No.1

Network externality can be defined as the effect that one user of a good or service has on the value of that product to other people. When a network externality is present, the value of a product or service is dependent on the number of others using it. There exist asymmetries in network externalities between the online and traditional offline marketing channels. Technological capabilities such as interactivity and real-time communications enable the creation of virtual communities. These user communities generate significant direct as well as indirect network externalities by creating added value through user ratings, reviews and feedback, which contributes to eliminate consumers’ concern for buying products without the experience of ‘touch and feel’. The offline channel offers much less scope for such community building, and consequently, almost no possibility for the creation of network externality. In this study, we analyze the effect of network externality on the competition between online and conventional offline marketing channels using game theory. To do this, we first set up a two-period game model to represent the competition between online and offline marketing channels under network externalities. Numerical analysis of the Nash equilibrium solutions of the game showed that the pricing strategies of online and offline channels heavily depend not only on the strength of network externality but on the relative efficiency of online channel. When the relative efficiency of online channel is high, the online channel can greatly benefit by the network externality. On the other hand, if the relative efficiency of online channel is low, the online channel may not benefit at all by the network externality.