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Competitive pricing strategies in social networks

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  • Ying‐Ju Chen
  • Yves Zenou
  • Junjie Zhou

Abstract

We study pricing strategies of competing firms selling heterogeneous products to consumers. Goods are substitutes and there are network externalities between neighboring consumers. In equilibrium, firms price discriminate based on the network positions and charge lower prices to more central consumers. We also show that, under some conditions, firms' equilibrium profits decrease when either the network becomes denser or network effects increase. In contrast, consumers always benefit from being more connected to each other. We determine the optimal network structure and compare uniform pricing and discriminatory pricing from the perspectives of firms and consumers.

Suggested Citation

  • Ying‐Ju Chen & Yves Zenou & Junjie Zhou, 2018. "Competitive pricing strategies in social networks," RAND Journal of Economics, RAND Corporation, vol. 49(3), pages 672-705, September.
  • Handle: RePEc:bla:randje:v:49:y:2018:i:3:p:672-705
    DOI: 10.1111/1756-2171.12249
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    Cited by:

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    2. Ushchev, Philip & Zenou, Yves, 2018. "Price competition in product variety networks," Games and Economic Behavior, Elsevier, vol. 110(C), pages 226-247.
    3. Matthew Elliott & Benjamin Golub, 2019. "A Network Approach to Public Goods," Journal of Political Economy, University of Chicago Press, vol. 127(2), pages 730-776.
    4. Kichko, Sergey & Picard, Pierre M., 2021. "Effect of conformism on firm selection, product quality and home bias," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 402-418.
    5. Ushchev, Philip & Zenou, Yves, 2018. "Price competition in product variety networks," Games and Economic Behavior, Elsevier, vol. 110(C), pages 226-247.
    6. Duan, Yongrui & Feng, Yixuan, 2021. "Optimal pricing in social networks considering reference price effect," Journal of Retailing and Consumer Services, Elsevier, vol. 61(C).
    7. Ushchev, Philip & Zenou, Yves, 2020. "Social norms in networks," Journal of Economic Theory, Elsevier, vol. 185(C).
    8. Jadbabaie, Ali & Kakhbod, Ali, 2019. "Optimal contracting in networks," Journal of Economic Theory, Elsevier, vol. 183(C), pages 1094-1153.
    9. Mohamed Belhaj & Frédéric Deroïan, 2016. "The Value of Network Information: Assortative Mixing Makes the Difference," Working Papers halshs-01314954, HAL.
    10. Masaki Aoyagi, 2020. "Connecting Heterogeneous Agents under Incomplete Information," ISER Discussion Paper 1089, Institute of Social and Economic Research, Osaka University.
    11. Jiao, Qian & Xu, Jin, 2020. "Competition for networked agents in the lottery Blotto game," Economics Letters, Elsevier, vol. 197(C).
    12. Arthur Campbell & C. Matthew Leister & Yves Zenou, 2020. "Word‐of‐mouth communication and search," RAND Journal of Economics, RAND Corporation, vol. 51(3), pages 676-712, September.
    13. Jullien, Bruno & Pavan, Alessandro & Rysman, Marc, 2021. "Two-sided Markets, Pricing, and Network Effects," TSE Working Papers 21-1238, Toulouse School of Economics (TSE).
    14. Aoyagi, Masaki, 2018. "Bertrand competition under network externalities," Journal of Economic Theory, Elsevier, vol. 178(C), pages 517-550.
    15. Ryo Itoh & Zonghui Li, 2021. "Effects of dual networks on tax strategies: geography and transaction," The Japanese Economic Review, Springer, vol. 72(1), pages 97-128, January.
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    17. Ningyuan Chen & Ying-Ju Chen, 2021. "Duopoly Competition with Network Effects in Discrete Choice Models," Operations Research, INFORMS, vol. 69(2), pages 545-559, March.

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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