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Bertrand competition under network externalities

Masaki Aoyagi

Journal of Economic Theory, 2018, vol. 178, issue C, 517-550

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 pricing strategies that are consistent with an equilibrium in which one of the firms monopolizes the market. The set includes marginal cost (MC) pricing as well as bipartition pricing, which offers discounts to some buyers and charges markups to others. We show that MC pricing fails to be an equilibrium under non-linear externalities in a general network, but identify conditions for an equilibrium with bipartition pricing to be robust against perturbations in the externalities from linearity. The analysis is applied to platform competition in a two-sided market under local and approximately linear externalities.

Keywords: Divide and conquer; Price discrimination; Two-sided markets; Local externalities (search for similar items in EconPapers)
JEL-codes: C72 D82 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Bertrand Competition under Network Externalities (2017) Downloads
Working Paper: Bertrand Competition under Network Externalities (2014) Downloads
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