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Bertrand Competition under Network Externalities

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  • Masaki Aoyagi

Abstract

Two sellers engage in price competition to attract buyers located on a network. The value of the good of either seller to any buyer depends on the number of neighbors on the network who consume the same good. For a generic specification of consumption externalities, we show that an equilibrium price equals the marginal cost if and only if the buyer network is complete or cyclic. When the externalities are approximately linear in the size of consumption, we identify the classes of networks in which one of the sellers monopolizes the market, or the two sellers segment the market.

Suggested Citation

  • Masaki Aoyagi, 2013. "Bertrand Competition under Network Externalities," ISER Discussion Paper 0884r, Institute of Social and Economic Research, Osaka University, revised May 2014.
  • Handle: RePEc:dpr:wpaper:0884r
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    Cited by:

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    2. Tamás Sebestyén & Balázs Szabó, 2022. "Market interaction structure and equilibrium price heterogeneity in monopolistic competition," Netnomics, Springer, vol. 22(2), pages 259-282, October.
    3. Goyal, S., 2016. "Networks and Markets," Cambridge Working Papers in Economics 1652, Faculty of Economics, University of Cambridge.
    4. Zenou, Yves & Chen, Ying-Ju & Zhou, Junjie, 2015. "Competitive pricing strategies in social networks," CEPR Discussion Papers 10857, C.E.P.R. Discussion Papers.
    5. Zenou, Yves & Chen, Ying-Ju & Zhou, Junjie, 2020. "Network Topology and Market Structure," CEPR Discussion Papers 14495, C.E.P.R. Discussion Papers.
    6. 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.
    7. Sanjeev Goyal, 2015. "Networks in Economics: A Perspective on the Literature," Cambridge Working Papers in Economics 1548, Faculty of Economics, University of Cambridge.
    8. Vintila Alexandra & Roman Mihai Daniel, 2021. "Bertrand competition under asymmetric conditions," Proceedings of the International Conference on Business Excellence, Sciendo, vol. 15(1), pages 235-244, December.
    9. Chen, Ying-Ju & Zenou, Yves & Zhou, Junjie, 2022. "The impact of network topology and market structure on pricing," Journal of Economic Theory, Elsevier, vol. 204(C).
    10. Masaki Aoyagi, 2022. "Many-to-Many Matching on a Skill-Sharing Platform," ISER Discussion Paper 1186, Institute of Social and Economic Research, Osaka University.
    11. 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.
    12. Shixun Wang & Lihong Yang, 2022. "The Network Structure of Innovation Networks," Networks and Spatial Economics, Springer, vol. 22(1), pages 65-96, March.
    13. Masaki Aoyagi, 2020. "Connecting Heterogeneous Agents under Incomplete Information," ISER Discussion Paper 1089, Institute of Social and Economic Research, Osaka University.
    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.

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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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