Advertising and pricing strategy in diffusion of network products

This paper studies duopolistic strategies for informative advertising and pricing with network externalities. Advertising and pricing are important marketing determinants for successful diffusion of network products, which exhibit different characteristics in respect to compatibility. It is shown that both advertising densities and prices for compatible products are less than for incompatible ones in pure-strategy equilibrium. The stronger the network effect, the lower the advertising density of incompatible goods, and the weaker the advertising incentive. Prices of both compatible and incompatible products decrease with advertising density, but the equilibrium price of incompatible products is lower than that of compatible ones. In addition, Compatibility optimizes the social welfare and firms´ revenue, but reduces consumer surplus. Incompatible firms would lower the level of advertising and charge higher price for profits.