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Local network externalities and market segmentation

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  • Banerji, A.
  • Dutta, Bhaskar

Abstract

This paper models interaction between groups of agents by means of a graph where each node represents a group of agents and an arc represents bilateral interaction. It departs from the standard Katz-Shapiro framework by assuming that network benefits are restricted only amongst groups of linked agents. It shows that even if rival firms engage in Bertrand competition, this form of network externalities permits strong market segmentation in which firms divide up the market and earn positive profits. The analysis also shows that some graphs or network structures do not permit such segmentation, while for others, there are easy to interpret conditions under which market segmentation obtains in equilibrium.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 27 (2009)
Issue (Month): 5 (September)
Pages: 605-614

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Handle: RePEc:eee:indorg:v:27:y:2009:i:5:p:605-614

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Web page: http://www.elsevier.com/locate/inca/505551

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Keywords: Network structure Network externalities Price competition Market segmentation;

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References

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  1. Luis Cabral, 2008. "Dynamic Price Competition with Network Effects," Working Papers 08-4, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Joseph Farrell & Michael L. Katz, 2003. "Innovation, Rent Extraction, and Integration in Systems Markets," Development and Comp Systems 0303005, EconWPA.
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  9. Matthew O. Jackson & Asher Wolinsky, 1994. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  11. Nicholas Economides, 1995. "The Economics of Networks," Working Papers 94-24, New York University, Leonard N. Stern School of Business, Department of Economics, revised Sep 1995.
  12. Jullien, Bruno, 2000. "Competing in Network Industries: Divide and Conquer," IDEI Working Papers 112, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jul 2001.
  13. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
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  17. Arun Sundararajan, 2004. "Local Network Effects and Network Structure," Industrial Organization 0412011, EconWPA.
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Citations

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Cited by:
  1. Andrea Galeotti & Sanjeev Goyal, 2007. "A Theory of Strategic Diffusion," Economics Discussion Papers 635, University of Essex, Department of Economics.
  2. Francis Bloch & Nicolas Quérou, 2008. "Pricing in networks," Working Papers hal-00356356, HAL.
  3. Fjeldstad, Øystein & Moen, Espen R & Riis, Christian, 2010. "Competition with Local Network Externalities," CEPR Discussion Papers 7778, C.E.P.R. Discussion Papers.
  4. Hornuf, Lars & Engert, Andreas, 2013. "Can Network Effects Impede Optimal Contracting in Debt Securities?," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79867, Verein für Socialpolitik / German Economic Association.
  5. Arnut Paothong & G. Ladde, 2014. "Agent-based modeling simulation under local network externality," Journal of Economic Interaction and Coordination, Springer, vol. 9(1), pages 1-26, April.
  6. Sääskilahti, Pekka, 2007. "Monopoly pricing of social goods," MPRA Paper 3526, University Library of Munich, Germany.
  7. Pradeep Dubey & Rahul Garg & Bernard De Meyer, 2013. "Competing for Customers in a Social Network (R)," Department of Economics Working Papers 13-01, Stony Brook University, Department of Economics.
  8. Oz Shy, 2010. "A short survey of network economics," Working Papers 10-3, Federal Reserve Bank of Boston.
  9. Bloch, Francis & Quérou, Nicolas, 2013. "Pricing in social networks," Games and Economic Behavior, Elsevier, vol. 80(C), pages 243-261.
  10. Giovanni Pegoretti & Francesco Rentocchini & Giuseppe Vittucci Marzetti, 2012. "An agent-based model of innovation diffusion: network structure and coexistence under different information regimes," Journal of Economic Interaction and Coordination, Springer, vol. 7(2), pages 145-165, October.

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