Bertrand Competition under Network Externalities

58 Pages Posted: 16 Mar 2017

See all articles by Masaki Aoyagi

Masaki Aoyagi

Osaka University - Institute of Social and Economic Research (ISER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 6, 2017

Abstract

Two firms engage in price competition to attract buyers located on a network. The value of the good of either firm to any buyer depends on the number of neighbors on the network who adopt the same good. When the size of externalities increases linearly with the number of adoptions, we identify the set of price strategies that are consistent with an equilibrium in which one of the firms monopolizes the market. The set includes marginal cost pricing as well as bipartition pricing, which offers discounts to some buyers and charges markups to others. We show that marginal cost pricing fails to be an equilibrium under non-linear externalities but identify conditions for an equilibrium with bipartition pricing to be robust against perturbations in the externalities from linearity. The idea of bipartition pricing is then applied to the analysis of platform competition in a two-sided market under local and approximately linear externalities.

Keywords: Graphs, Divide and Conquer, Price Discrimination, Two-Sided Markets, Partition

JEL Classification: C72, D82

Suggested Citation

Aoyagi, Masaki, Bertrand Competition under Network Externalities (March 6, 2017). ISER Discussion Paper No. 993, Available at SSRN: https://ssrn.com/abstract=2932582 or http://dx.doi.org/10.2139/ssrn.2932582

Masaki Aoyagi (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan
+81 6 6879 8557 (Phone)
+81 6 6878 2766 (Fax)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
88
Abstract Views
640
Rank
298,914
PlumX Metrics