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Local Network Externalities and Market Segmentation

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Author Info

  • Banerji, A

    (Delhi School of Economics, University of Delhi)

  • Dutta, Bhaskar

    (Department of Economics, University of Warwick,)

Abstract

This paper models interaction between groups of agents by means of a graph where each node represents a group of agents and an arc represents bilateral interaction. It departs from the standard Katz-Shapiro framework by assuming that network benefits are restricted only amongst groups of linked agents. It shows that even if rival firms engage in Bertrand competition, this form of network externalities permits strong market segmentation in which firms divide up the market and earn positive profits. The analysis also shows that some graphs or network structures do not permit such segmentation, while for others, there are easy to interpret conditions under which market segmentation obtains in equilibrium

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_725.pdf
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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 725.

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Length: 29 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:wrk:warwec:725

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Keywords: network structure ; network externalities ; price competition ; market segmentation;

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References

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  1. Joseph Farrell and Michael L. Katz., 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Economics Working Papers E00-286, University of California at Berkeley.
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  4. Luís Cabral, 2011. "Dynamic Price Competition with Network Effects," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 83-111.
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  8. Argenziano, Rossella & Ambrus, Attila, 2009. "Asymmetric Networks in Two-sided Markets," Scholarly Articles 4589709, Harvard University Department of Economics.
  9. Arun Sundararajan, 2004. "Local Network Effects and Network Structure," Industrial Organization 0412011, EconWPA.
  10. Mark Armstrong, 2006. "Competition in two‐sided markets," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 668-691, 09.
  11. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 105-23, March.
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  13. Waldman, Michael, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 273-83, February.
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  15. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-28, Summer.
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Cited by:
  1. Oz Shy, 2010. "A short survey of network economics," Working Papers 10-3, Federal Reserve Bank of Boston.
  2. Sanjeev Goyal & Andrea Galeotti, 2007. "A Theory of Strategic Diffusion," Working Papers 2007.70, Fondazione Eni Enrico Mattei.
  3. Francis Bloch & Nicolas Quérou, 2008. "Pricing in networks," Working Papers hal-00356356, HAL.
  4. Sääskilahti, Pekka, 2007. "Monopoly pricing of social goods," MPRA Paper 3526, University Library of Munich, Germany.
  5. Fjeldstad, Øystein & Moen, Espen R & Riis, Christian, 2010. "Competition with Local Network Externalities," CEPR Discussion Papers 7778, C.E.P.R. Discussion Papers.

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