International Journal of Business and Economics Volume 1, No. 3 December, 2002

Pricing, Quality-Setting, and Order of Plays in an Online Information Market

Sang-Ho Lee

Department of Economics, Chonnam National University, Korea

Abstract

This paper considers the issue of quality differentiation in an online information market in which one network provider and two content providers compete over both prices and con-tent qualities for the real-time network delivery of digital information products. We examine the order of plays in games of vertical product differentiation and show that sequential price choice of network providers reduces content differentiation among online information prod-ucts, so that intense price competition among content providers results. However, sequential price competition reduces not only social welfare but also consumers' surplus.

Keywords：sequential price competition, content differentiation, online information product.

JEL Classifications：L1, D4.

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