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

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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)

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Ralph-C Bayer

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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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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Article
- Ralph-C. Bayer & Mickey Chan, 2007. "Network Externalities, Demand Inertia and Dynamic Pricing in an Experimental Oligopoly Market," The Economic Record, The Economic Society of Australia, vol. 83(263), pages 405-415, December. [Downloadable!] (restricted)
Paper
- Ralph-C Bayer & Mickey Chan, 2004. "Network Externalities, Demand Inertia, and Dynamic Pricing in an Experimental Oligopoly Market," Econometric Society 2004 Australasian Meetings 108, Econometric Society.

Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

This paper has been announced in the following NEP Reports:

NEP-ALL-2004-12-20 (All new papers)
NEP-COM-2004-12-20 (Industrial Competition)
NEP-EXP-2004-12-21 (Experimental Economics)
NEP-EXP-2004-12-20 (Experimental Economics)
NEP-GTH-2004-12-20 (Game Theory)
NEP-IND-2004-12-20 (Industrial Organization)
NEP-NET-2004-12-20 (Network Economics)

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Other versions:
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