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

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  • Ralph C Bayer

    (University of Adelaide)

  • Mickey Chan

    (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 e¤ects. We use an experimental duopoly market with demand inertia to isolate the effect of network externalities. We find that experimental price dynamics are rather consistent with real world observations than with theoretical predictions.

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Bibliographic Info

Paper provided by EconWPA in its series Experimental with number 0412004.

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Date of creation: 14 Dec 2004
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Handle: RePEc:wpa:wuwpex:0412004

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Keywords: Network Externalities; Demand Inertia; Experiments; Oligopoly;

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  1. 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.
  2. De Bijl, P.W.J. & Goyal, S., 1992. "Technological Change in Markets with Network Externalities," Papers 9233, Tilburg - Center for Economic Research.
  3. Steffen Huck & Hans-Theo Normann & Joerg Oechssler, 1998. "Does information about competitors' actions increase or decrease competition in experimental oligopoly markets?," Industrial Organization 9803004, EconWPA.
  4. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  5. 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.
  6. Anette Boom & Pio Baake, . "Vertical Product Differentiation, Network Externalities, and Compatibility Decisions," Papers 010, Departmental Working Papers.
  7. 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.
  8. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  9. 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.
  10. 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.
  11. 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.
  12. 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).
  13. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
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Cited by:
  1. 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.
  2. Ralph-C Bayer, 2006. "Intertemporal Price Discrimination and Competition," School of Economics Working Papers 2006-06, University of Adelaide, School of Economics.

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