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Dynamic Price Competition with Network Effects

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  • Luís Cabral

Abstract

I consider a dynamic model of competition between two proprietary networks. Consumers die and are replaced with a constant hazard rate, and firms compete for new consumers to join their network by offering network entry prices. I derive a series of results pertaining to (a) existence and uniqueness of symmetric equilibria, (b) monotonicity of the pricing function (e.g. larger networks set higher prices), (c) network size dynamics (increasing dominance vs. reversion to the mean), and (d) firm value (how it varies with network effects). Finally, I apply my general framework to the study of termination charges in wireless telecommunications. I consider various forms of regulation and examine their impact on firm profits and market share dynamics. Copyright 2011, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/restud/rdq007
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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 78 (2011)
Issue (Month): 1 ()
Pages: 83-111

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Handle: RePEc:oup:restud:v:78:y:2011:i:1:p:83-111

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Cited by:
  1. Corrado Benassi & Marcella Scrimitore, 2013. "Income Distribution in Network Markets," Working Paper Series 13_13, The Rimini Centre for Economic Analysis.
  2. Claussen, Jörg & Trüg, Moritz & Zucchini, Leon, 2011. "Termination-Based Price Discrimination: Tariff-Mediated Network Effects and the Fat-Cat Effect," Discussion Papers in Business Administration 12688, University of Munich, Munich School of Management.
  3. A. Banerji & Bhaskar Dutta, 2008. "Local network externalities and market segmentation," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 08-13, Indian Statistical Institute, New Delhi, India.
  4. Muck, Johannes, 2012. "The effect of on-net / off-net differentiation and heterogeneuous consumers on network size in mobile telecommunications : an agent-based aporoach," 23rd European Regional ITS Conference, Vienna 2012 60355, International Telecommunications Society (ITS).
  5. Harbord, David & Hoernig, Steffen, 2010. "Welfare Analysis of Regulating Mobile Termination Rates in the UK (with an Application to the Orange/T-Mobile Merger)," CEPR Discussion Papers 7730, C.E.P.R. Discussion Papers.
  6. Zucchini, Leon & Claussen, Jörg & Trüg, Moritz, 2013. "Tariff-Mediated Network Effects versus Strategic Discounting: Evidence from German Mobile Telecommunications," Discussion Papers in Business Administration 14848, University of Munich, Munich School of Management.
  7. Harbord, David & Pagnozzi, Marco, 2008. "On-Net/Off-Net Price Discrimination and 'Bill-and-Keep' vs. 'Cost-Based' Regulation of Mobile Termination Rates," MPRA Paper 14540, University Library of Munich, Germany.
  8. Zucchini, Leon & Claussen, Jörg & Trüg, Moritz, 2012. "Tariff-Mediated Network Effects versus Strategic Discounting: Evidence from German Mobile Telecommunications," Discussion Papers in Business Administration 13764, University of Munich, Munich School of Management.

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