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Price Competition in Product Variety Networks

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  • Zenou, Yves
  • Ushchev, Philip

Abstract

We develop a product-differentiated model where the product space is a network defined as a set of varieties (nodes) linked by their degree of substituabilities (edges). In this network, we also locate consumers so that the location of each consumer (node) corresponds to her "ideal" variety. We show that there exists a unique Nash equilibrium in the price game among firms. Equilibrium prices are determined by firms' weighted 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.

Suggested Citation

  • Zenou, Yves & Ushchev, Philip, 2015. "Price Competition in Product Variety Networks," CEPR Discussion Papers 10862, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:10862
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    2. Jacques-François Thisse & Philip Ushchev, 2018. "Monopolistic competition without apology," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume I, chapter 5, pages 93-136, Edward Elgar Publishing.
    3. Toomas Hinnosaar, 2019. "Price Setting on a Network," Papers 1904.06757, arXiv.org.
    4. Panebianco, Fabrizio & Verdier, Thierry & Zenou, Yves, 2016. "Innovation, Pricing and Targeting in Networks," CEPR Discussion Papers 11398, C.E.P.R. Discussion Papers.
    5. 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.
    6. Ushchev, Philip & Zenou, Yves, 2020. "Social norms in networks," Journal of Economic Theory, Elsevier, vol. 185(C).
    7. Kor, Ryan & Zhou, Junjie, 2023. "Multi-activity influence and intervention," Games and Economic Behavior, Elsevier, vol. 137(C), pages 91-115.
    8. Jacques-François Thisse & Filipp Ushchev, 2018. "Monopolistic competition without apology," ULB Institutional Repository 2013/387748, ULB -- Universite Libre de Bruxelles.
    9. Agrawal, David R. & Bagh, Adib & Mardan, Mohammed, 0. "Sensitivity versus size: implications for tax competition," Theoretical Economics, Econometric Society.
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    11. Takeda, Kohei & Hosoe, Toyoki & Watanabe, Takayuki & Matsubayashi, Nobuo, 2018. "Stability analysis of horizontal mergers in a market with asymmetric substitutability," Mathematical Social Sciences, Elsevier, vol. 96(C), pages 73-84.
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    14. Sergey Kokovin & Alina Ozhegova & Shamil Sharapudinov & Alexander Tarasov & Philip Ushchev, 2024. "A Theory of Monopolistic Competition with Horizontally Heterogeneous Consumers," American Economic Journal: Microeconomics, American Economic Association, vol. 16(2), pages 354-384, May.
    15. Zenou, Yves & Chen, Ying-Ju & Zhou, Junjie, 2020. "Network Topology and Market Structure," CEPR Discussion Papers 14495, C.E.P.R. Discussion Papers.
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    More about this item

    Keywords

    Monopolistic competition; Networks; Product variety; Spatial competition;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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