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Local network externalities and market segmentation

Author

Listed:
  • A. Banerji

    () (Delhi School of Economics)

  • Bhaskar Dutta

    () (University of Warwick, UK)

Abstract

This paper models interaction between groups of agents by means of a graph where each node represents a group of agents and an arc represents bilateral interaction. It departs from the standard Katz-Shapiro framework by assuming that network benefits are restricted only amongst groups of linked agents. It shows that even if rival firms engage in Bertrand competition, this form of network externalities permits strong market segmentation in which firms divide up the market and earn positive profits. The analysis also shows that some graphs or network structures do not permit such segmentation, while for others, there are easy to interpret conditions under which market segmentation obtains in equilibrium.

Suggested Citation

  • A. Banerji & Bhaskar Dutta, 2008. "Local network externalities and market segmentation," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 08-13, Indian Statistical Institute, New Delhi, India.
  • Handle: RePEc:ind:isipdp:08-13
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    File URL: http://www.isid.ac.in/~pu/dispapers/dp08-13.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Arnut Paothong & G. Ladde, 2014. "Agent-based modeling simulation under local network externality," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 9(1), pages 1-26, April.
    2. Ushchev, Philip & Zenou, Yves, 2015. "Price Competition in Product Variety Networks," CEPR Discussion Papers 10862, C.E.P.R. Discussion Papers.
    3. Jonathan Sandbach & Luke van Hooft, 2010. "Using On-net / Off-net Price Differential to Measure the Size of Call Externalities and its Implications for Setting Efficient Mobile Termination Rates," Chapters,in: Promoting New Telecom Infrastructures, chapter 15 Edward Elgar Publishing.
    4. Oz Shy, 2011. "A Short Survey of Network Economics," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 38(2), pages 119-149, March.
    5. Pradeep K. Dubey & Rahul Garg & Bernard De Meyer, 2006. "Competing for Customers in a Social Network," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00272889, HAL.
    6. Sanjeev Goyal & Andrea Galeotti, 2007. "A Theory of Strategic Diffusion," Working Papers 2007.70, Fondazione Eni Enrico Mattei.
    7. Giovanni Pegoretti & Francesco Rentocchini & Giuseppe Vittucci Marzetti, 2012. "An agent-based model of innovation diffusion: network structure and coexistence under different information regimes," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 7(2), pages 145-165, October.
    8. Chen, Ying-Ju & Zenou, Yves & Zhou, Junjie, 2015. "Competitive pricing strategies in social networks," CEPR Discussion Papers 10857, C.E.P.R. Discussion Papers.
    9. Francis Bloch & Nicolas Quérou, 2008. "Pricing in networks," Working Papers hal-00356356, HAL.
    10. Palsule-Desai, Omkar D., 2015. "Cooperatives for fruits and vegetables in emerging countries: Rationalization and impact of decentralization," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 81(C), pages 114-140.
    11. Hornuf, Lars & Engert, Andreas, 2013. "Can Network Effects Impede Optimal Contracting in Debt Securities?," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79867, Verein für Socialpolitik / German Economic Association.
    12. Pekka Sääskilahti, 2015. "Monopoly Pricing of Social Goods," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 22(3), pages 429-448, November.
    13. repec:wsi:ijitdm:v:11:y:2012:i:03:n:s0219622012500101 is not listed on IDEAS
    14. Fjeldstad, Øystein & Moen, Espen R & Riis, Christian, 2010. "Competition with Local Network Externalities," CEPR Discussion Papers 7778, C.E.P.R. Discussion Papers.
    15. Itoh, Ryo, 2014. "Tax discrimination against inter-firm networks," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 25-35.
    16. Bloch, Francis & Quérou, Nicolas, 2013. "Pricing in social networks," Games and Economic Behavior, Elsevier, vol. 80(C), pages 243-261.
    17. Elias Carroni & Simone Righi, 2015. "Pricing in Social Networks under Limited Information," Working Papers 1503, University of Namur, Department of Economics.

    More about this item

    Keywords

    network structure; network externalities; price competition; market segmentation;

    JEL classification:

    • D7 - Microeconomics - - Analysis of Collective Decision-Making

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