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Local Network Externalities and Market Segmentation

Author

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  • Banerji, A

    (Delhi School of Economics, University of Delhi)

  • Dutta, Bhaskar

    (Department of Economics, University of Warwick,)

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

  • Banerji, A & Dutta, Bhaskar, 2005. "Local Network Externalities and Market Segmentation," The Warwick Economics Research Paper Series (TWERPS) 725, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:725
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    References listed on IDEAS

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    Cited by:

    1. 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: Morten Falch & Jan Markendahl (ed.), Promoting New Telecom Infrastructures, chapter 15, Edward Elgar Publishing.
    2. Aoyagi, Masaki, 2018. "Bertrand competition under network externalities," Journal of Economic Theory, Elsevier, vol. 178(C), pages 517-550.
    3. 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.
    4. 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.
    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. Ushchev, Philip & Zenou, Yves, 2018. "Price competition in product variety networks," Games and Economic Behavior, Elsevier, vol. 110(C), pages 226-247.
    7. Kaifu Zhang & Miklos Sarvary, 2015. "Differentiation with User-Generated Content," Management Science, INFORMS, vol. 61(4), pages 898-914, April.
    8. 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.
    9. 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.
    10. Itoh, Ryo, 2014. "Tax discrimination against inter-firm networks," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 25-35.
    11. Bloch, Francis & Quérou, Nicolas, 2013. "Pricing in social networks," Games and Economic Behavior, Elsevier, vol. 80(C), pages 243-261.
    12. 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.
    13. Ushchev, Philip & Zenou, Yves, 2018. "Price competition in product variety networks," Games and Economic Behavior, Elsevier, vol. 110(C), pages 226-247.
    14. 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.
    15. Goyal, Sanjeev & Galeotti, Andrea, 2007. "A Theory of Strategic Diffusion," Coalition Theory Network Working Papers 9096, Fondazione Eni Enrico Mattei (FEEM).
    16. 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.
    17. Kim, Suwon, 2018. "Snack-media platform market segmentation based on user heterogeneity: A Q-methodology approach," 22nd ITS Biennial Conference, Seoul 2018. Beyond the boundaries: Challenges for business, policy and society 190357, International Telecommunications Society (ITS).
    18. Elias Carroni & Paolo Pin & Simone Righi, 2018. "Bring a friend! Privately or Publicly?," Papers 1807.01994, arXiv.org, revised Dec 2018.
    19. Niladri B. Syam & Amit Pazgal, 2013. "Co-Creation with Production Externalities," Marketing Science, INFORMS, vol. 32(5), pages 805-820, September.
    20. Francis Bloch & Nicolas Quérou, 2008. "Pricing in networks," Working Papers hal-00356356, HAL.
    21. 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.
    22. В.Е. Дементьевi & * & Е.В. Устюжанинаii & **, 2019. "Сравнительный Анализ Стратегий Динамического Ценообразования На Рынках Сетевых Благ В Случаях Монополии И Предконкурентного Стратегического Альянса," Журнал Экономика и математические методы (ЭММ), Центральный Экономико-Математический Институт (ЦЭМИ), vol. 55(1), pages 16-31, январь.
    23. Hannu Kivijärvi & Petri Hallikainen & Esko Penttinen, 2012. "SUPPORTING IT IMPLEMENTATION DECISIONS WITH ANP — SUPPLIER SCHEDULING FORe-INVOICING," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 11(03), pages 525-550.
    24. Fjeldstad, Øystein & Moen, Espen R & Riis, Christian, 2010. "Competition with Local Network Externalities," CEPR Discussion Papers 7778, C.E.P.R. Discussion Papers.
    25. 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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