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Network Externalities, Demand Inertia and Dynamic Pricing in an Experimental Oligopoly Market

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  • Ralph-C Bayer

    ()
    (School of Economics, University of Adelaide)

  • Mickey Chan

    (School of Economics, University of Adelaide)

Abstract

This paper analyses dynamic pricing in markets with network externalities. Network externalities imply demand inertia, because the size of a network increases the usefulness of the product for consumers. Since past sales increase current demand, firms have an incentive to set low introductory prices to be able to increase prices as their networks grow. However, in reality we observe decreasing prices. This could be due to other factors dominating the network effects. We use an experimental duopoly market with demand inertia to isolate the e¤ect of network externalities. We find that experimental price dynamics are rather consistent with real world observations than with theoretical predictions.

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File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2004-08.pdf
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Bibliographic Info

Paper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2004-08.

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Length: 33 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:adl:wpaper:2004-08

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Web page: http://www.economics.adelaide.edu.au/
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Keywords: network externalities; demand inertia; experiments; oligopoly;

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References

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  1. Economides, Nicholas, 1996. "The economics of networks," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 673-699, October.
  2. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  3. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
  4. Anette Boom & Pio Baake, . "Vertical Product Differentiation, Network Externalities, and Compatibility Decisions," Papers 010, Departmental Working Papers.
  5. S. J. Liebowitz & Stephen E. Margolis, 1994. "Network Externality: An Uncommon Tragedy," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 133-150, Spring.
  6. Huck, Steffen & Normann, Hans-Theo & Oechssler, Jorg, 2000. "Does information about competitors' actions increase or decrease competition in experimental oligopoly markets?," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 39-57, January.
  7. Cabral, Luis M. B. & Salant, David J. & Woroch, Glenn A., 1999. "Monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 199-214, February.
  8. Bensaid, Bernard & Lesne, Jean-Philippe, 1996. "Dynamic monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 837-855, October.
  9. Brandts, J. & Figueras, N., 1997. "An Exploration of Reputation Formation in Experimental Games," UFAE and IAE Working Papers 404.97, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  10. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
  11. De Bijl, Paul W. J. & Goyal, Sanjeev, 1995. "Technological change in markets with network externalities," International Journal of Industrial Organization, Elsevier, vol. 13(3), pages 307-325, September.
  12. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  13. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
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Cited by:
  1. Ralph-C Bayer, 2006. "Intertemporal Price Discrimination and Competition," School of Economics Working Papers 2006-06, University of Adelaide, School of Economics.
  2. A. Paothong & G.S. Ladde, 2012. "Generalized Network Externality Function," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 42(3), pages 363-387, December.

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