Strategic Discount Adoption in Network Oligopolies

Discount pricing is widely observed in network industries based on complementary products, yet little is known about the incentives governing firms’ choice of pricing structure. This paper develops a tractable n-firm model of endogenous pricing-regime adoption that yields closed-form equilibrium outcomes for all asymmetric adoption configurations. The analysis identifies a pricing-regime Prisoner’s Dilemma. Although universal undiscounted pricing maximises welfare, consumer surplus and, over a wide range of parameter values, aggregate industry profit, individually profitable discount adoption drives the industry towards universal discounting as the unique equilibrium despite its inferior welfare properties. Each adoption benefits the adopting firm at the expense of every rival firm, creating a negative profit externality that progressively reduces welfare and consumer surplus. Policies restricting discount pricing increase welfare, but their incidence depends critically on scope: narrow interventions disadvantage regulated firms, whereas broader restrictions can coordinate firms on a more efficient pricing regime. The results show that pricing structures are themselves strategic objects of competition and that expanding firms’ pricing opportunities can leave both firms and consumers collectively worse off.