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Price Competition in Product Variety Networks

Listed author(s):
  • Ushchev, Philip
  • Zenou, Yves

We develop a product-differentiated model where the product space is a network defined as a set of varieties (nodes) linked by their degrees of substitutability (edges). We also locate consumers into this network, so that the location of each consumer (node) corresponds to her “ideal” variety. We show that, even though prices need not to be strategic complements, there exists a unique Nash equilibrium in the price game among firms. Equilibrium prices are determined by both firms’ sign-alternating Bonacich centralities and the average willingness to pay across consumers. They both hinge on the network structure of the firm-product space. We also investigate how local product differentiation and the spatial discount factor affect the equilibrium prices. We show that these effects non-trivially depend on the network structure. In particular, we find that, in a star-shaped network, the firm located in the star node does not always enjoy higher monopoly power than the peripheral firms.

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File URL: http://purl.umn.edu/244535
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Paper provided by Fondazione Eni Enrico Mattei (FEEM) in its series ET: Economic Theory with number 244535.

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Date of creation: 07 Sep 2016
Handle: RePEc:ags:feemet:244535
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