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A Consumer-Based Model of Competitive Diffusion of Two Goods: The Effects of Network Externalities and Local Interactions

Author

Listed:
  • Masaki Tomochi

    (Institute for Mathematical Behavioral Sciences, University of California, Irvine)

  • Hiroaki Murata

    (Chuo Computer System)

  • Mitsuo Kono

    (Faculty of Policy Studies, Chuo University)

Abstract

The diffusion of two competitive, interchangeable, and durable goods is studied under the framework of a spatial game where consumers are distributed on a two-dimensional square lattice and play 3$\times$3 symmetric coordination-like games with their nearest neighbors. There are three strategies, either consuming a product A or B, or a strategy C of not consuming either A or B. The payoff matrix of the game contains the positive effects of network externality, that is, the payoffs are increasing functions of the number of agents adopting the strategies A or B. Both simulations and mean-field approximation show that the existence of the positive effects of the network externality amplifies any slight initial difference in the number of agents who adopt either A or B and eventually promotes the superior product to take over the entire market. On the other hand, without effects of the network externality the slight initial difference is not enlarged and both superior and inferior products are observed to coexist by forming clusters in the market. Moreover, the effects of innovation factors that help an inferior product to retake the market are studied. It is shown that both the timing and size of the innovation factor matter for an inferior product in order to retake the market.

Suggested Citation

  • Masaki Tomochi & Hiroaki Murata & Mitsuo Kono, 2002. "A Consumer-Based Model of Competitive Diffusion of Two Goods: The Effects of Network Externalities and Local Interactions," Game Theory and Information 0205006, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpga:0205006
    Note: Type of Document - PDF; prepared on MicroSoft Windows; to print on ps; pages: 26; figures: separate but included (PDF). pdf format. comments are more than welcome.
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    References listed on IDEAS

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    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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