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Price competition on networked duopolistic markets

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In standard Bertrand model duopolists compete on perfect markets. However, not many markets are perfect. In fact most of the markets have certainstructure, and this structure is known to producers. We describe the marketorganization by modeling consumer-producer networks and demonstrate thatif this structure is known to producers implications of the price competitiondepart substantially from the ones predicted by standard models. In particular we show that multiple pure strategy equilibria can emerge. We investigatethe role of ?rm and consumer heterogeneity towards sustaining price dispersionas an equilibrium outcome. It turns out that if consumers are homogenouswe need large dose of ?rm heterogeneity in order to sustain price dispersionin equilibrium. However, if consumers are heterogenous even small asymmetries across producers imply price dispersion. It is also predicted that largerconsumer heterogeneity leads to higher prices in equilibrium.

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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2011-09.

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Date of creation: Apr 2011
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Handle: RePEc:fce:doctra:1108

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Keywords: price competition; networks; heterogeneity; price dispersion.;

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