Quality degradation, competition and product differentiation

Abstract

The thesis examines the economic of information service in the case of service quality downgrade as user number increases (congestion externality). It is a notable phenomenon when the service demands system resources critically. We set up three usability models, and explore them in monopolist and duopoly market, respectively. The results were then compared and it suggests that in monopolist market, the quality downgrade will generate a fluctuation of user population, and ISP tend to set the price higher to minimize fluctuations and ensure profits. While in duopoly market, there is no market equilibrium and both firms will try to be the price leader. Further more, given the opportunity to offer two products, the firm will opt for offering a single product.