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The impact of network topology and market structure on pricing

The impact of network topology and market structure on pricing
The impact of network topology and market structure on pricing
We develop a two-stage oligopolistic network competition model where, first, firms simultaneously determine their prices, and, second, consumers connected through a network determine their consumption. We show that firms price-discriminate consumers based on the consumer's network position. Denser networks (i.e., network topology) reduce prices, whereas increased competition (i.e., market structure) reduces prices only when competition is weak. However, the prices charged for the most influential consumers can increase with the number of firms when competition is very fierce and when there are strong network externalities. We also show that increasing competition always leads to lower firm profits, whereas equilibrium profits respond to the number of firms more sensitively when the network is denser or the externalities parameter is larger. Finally, we study the effects of network topology and market structure on price dispersion and determine the optimal network structure based on the perspective of both firms and consumers. We also extend the baseline model to allow for asymmetric firms and product compatibility.
Market structure, Network position, Price discrimination, Spectral decomposition
0022-0531
Chen, Ying-Ju
fee113d1-b104-434f-8d84-c178a98920af
Zenou, Yves
38bf0c72-462b-4c08-8fd1-ce365b0296dc
Zhou, Junjie
338c0b4b-851c-4c8f-92d0-a74725f5e38d
Chen, Ying-Ju
fee113d1-b104-434f-8d84-c178a98920af
Zenou, Yves
38bf0c72-462b-4c08-8fd1-ce365b0296dc
Zhou, Junjie
338c0b4b-851c-4c8f-92d0-a74725f5e38d

Chen, Ying-Ju, Zenou, Yves and Zhou, Junjie (2022) The impact of network topology and market structure on pricing. Journal of Economic Theory, 204, [105491]. (doi:10.1016/j.jet.2022.105491).

Record type: Article

Abstract

We develop a two-stage oligopolistic network competition model where, first, firms simultaneously determine their prices, and, second, consumers connected through a network determine their consumption. We show that firms price-discriminate consumers based on the consumer's network position. Denser networks (i.e., network topology) reduce prices, whereas increased competition (i.e., market structure) reduces prices only when competition is weak. However, the prices charged for the most influential consumers can increase with the number of firms when competition is very fierce and when there are strong network externalities. We also show that increasing competition always leads to lower firm profits, whereas equilibrium profits respond to the number of firms more sensitively when the network is denser or the externalities parameter is larger. Finally, we study the effects of network topology and market structure on price dispersion and determine the optimal network structure based on the perspective of both firms and consumers. We also extend the baseline model to allow for asymmetric firms and product compatibility.

Text
Network Topology Market Structure-April_2022 - Accepted Manuscript
Restricted to Repository staff only until 6 June 2024.
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More information

Accepted/In Press date: 24 May 2022
e-pub ahead of print date: 6 June 2022
Published date: September 2022
Additional Information: Publisher Copyright: © 2022 Elsevier Inc.
Keywords: Market structure, Network position, Price discrimination, Spectral decomposition

Identifiers

Local EPrints ID: 457834
URI: http://eprints.soton.ac.uk/id/eprint/457834
ISSN: 0022-0531
PURE UUID: fb67dad6-b2ca-45c3-9067-c0c238be9b32
ORCID for Yves Zenou: ORCID iD orcid.org/0000-0001-6516-0812

Catalogue record

Date deposited: 20 Jun 2022 16:47
Last modified: 03 Feb 2023 18:18

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Contributors

Author: Ying-Ju Chen
Author: Yves Zenou ORCID iD
Author: Junjie Zhou

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