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Endogenous unrestricted locations in markets with network effects

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  • Ribeiro, Vitor

Abstract

The paper studies indirect network effects in a market composed by two incompatible intermediaries that choose price (short-term issue) in addition to location (long-term issue). The paper first shows that (i) when the network externality is sufficiently weak, only maximum differentiation prevails, (ii) the location equilibrium can be asymmetric for an intermediate level of the network externality, given that the first entrant locates at the city centre while the follower chooses an extreme (niche) positional location and (iii) tipping occurs favouring the leader in the location choice when the intensity of the network externality is sufficiently strong. Moreover, the paper concludes that the likelihood of an asymmetric location equilibrium is higher when there is no mismatch between the product space occupied by consumers and intermediaries. Finally, the author concludes that a penetration pricing strategy conducted by a third intermediary is more successful when the pre-entry condition is not the tipping equilibrium location.

Suggested Citation

  • Ribeiro, Vitor, 2015. "Endogenous unrestricted locations in markets with network effects," Economics Discussion Papers 2015-11, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:201511
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    simple network effect; unconstrained spatial competition; location leadership;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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