The Network Origins of Entry

Arthur Campbell, Philip Ushchev and Yves Zenou

Journal of Political Economy, 2024, vol. 132, issue 11, 3867 - 3916

Abstract: We develop a model of market entry under social learning through word of mouth (WOM). The success of an entrant depends on consumer awareness generated via WOM, modeled as a percolation process on a random graph. The likelihood of an entrant gaining significant awareness depends on network structure, characterized by the first three factorial moments of the degree distribution. We identify three pricing equilibria: blockaded, deterred, and accommodated entry. The model demonstrates that increased network density can shift equilibria from blockaded to deterred and eventually to accommodated entry. Numerical simulations suggest that consumer surplus may be nonmonotonic with respect to network density. Additionally, if incumbents can charge personalized prices based on consumers' connectivity, they may optimally set lower prices for highly connected consumers.

Date: 2024
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Working Paper: The Network Origins of Entry (2023)
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