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Competitive pricing strategies in social networks

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  • Chen, Ying-Ju
  • Zenou, Yves
  • Zhou, Junjie

Abstract

We study pricing strategies of competing firms who sell heterogeneous products to a group of customers in a social network. Goods are substitutes and each customer gains network externalities from her neighbors who consume the same products. We show that there is a unique subgame-perfect equilibrium where, first, firms choose the prices of each good for each consumer, and, then, individuals decide their consumption of the goods. We also fully characterize the equilibrium prices for any network structure, and relate these equilibrium outcomes to the familiar Katz-Bonacich network centrality measures. Contrary to the monopoly case, the equilibrium price of a customer not only depends on her own characteristics but also on others' characteristics. We show that firms price discriminate and charge lower prices to more central consumers. This means that more central consumers obtain a larger discount because of their impact in terms of consumption on their neighbors. We also show that the firms' equilibrium profits can decrease when either the network becomes denser or network effects are higher.

Suggested Citation

  • Chen, Ying-Ju & Zenou, Yves & Zhou, Junjie, 2015. "Competitive pricing strategies in social networks," CEPR Discussion Papers 10857, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10857
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    Cited by:

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    2. Aoyagi, Masaki, 2018. "Bertrand competition under network externalities," Journal of Economic Theory, Elsevier, vol. 178(C), pages 517-550.
    3. Ushchev, Philip & Zenou, Yves, 2020. "Social norms in networks," Journal of Economic Theory, Elsevier, vol. 185(C).
    4. 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.
    5. Ushchev, Philip & Zenou, Yves, 2018. "Price competition in product variety networks," Games and Economic Behavior, Elsevier, vol. 110(C), pages 226-247.
    6. Li, Yongli & Luo, Peng & Pin, Paolo, 2021. "Link value, market scenario and referral networks," Journal of Economic Behavior & Organization, Elsevier, vol. 181(C), pages 135-155.
    7. 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.
    8. Mohamed Belhaj & Frédéric Deroïan, 2016. "The Value of Network Information: Assortative Mixing Makes the Difference," Working Papers halshs-01314954, HAL.
    9. 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.
    10. Jadbabaie, Ali & Kakhbod, Ali, 2019. "Optimal contracting in networks," Journal of Economic Theory, Elsevier, vol. 183(C), pages 1094-1153.
    11. Masaki Aoyagi, 2020. "Connecting Heterogeneous Agents under Incomplete Information," ISER Discussion Paper 1089, Institute of Social and Economic Research, Osaka University.
    12. 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.
    13. Duan, Yongrui & Feng, Yixuan, 2021. "Optimal pricing in social networks considering reference price effect," Journal of Retailing and Consumer Services, Elsevier, vol. 61(C).
    14. 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.
    15. Ushchev, Philip & Zenou, Yves, 2018. "Price competition in product variety networks," Games and Economic Behavior, Elsevier, vol. 110(C), pages 226-247.
    16. Leduc, Matt V. & Jackson, Matthew O. & Johari, Ramesh, 2017. "Pricing and referrals in diffusion on networks," Games and Economic Behavior, Elsevier, vol. 104(C), pages 568-594.
    17. Jiao, Qian & Xu, Jin, 2020. "Competition for networked agents in the lottery Blotto game," Economics Letters, Elsevier, vol. 197(C).

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    More about this item

    Keywords

    competition; differentiated products; pricing; social networks;
    All these keywords.

    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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