Network Externalities, Demand Inertia and Dynamic Pricing in an Experimental Oligopoly Market

Ralph-C Bayer () and Mickey Chan
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Mickey Chan: School of Economics, University of Adelaide

No 2004-08, School of Economics and Public Policy Working Papers from University of Adelaide, School of Economics and Public Policy

Abstract: This paper analyses dynamic pricing in markets with network externalities. Network externalities imply demand inertia, because the size of a network increases the usefulness of the product for consumers. Since past sales increase current demand, firms have an incentive to set low introductory prices to be able to increase prices as their networks grow. However, in reality we observe decreasing prices. This could be due to other factors dominating the network effects. We use an experimental duopoly market with demand inertia to isolate the e¤ect of network externalities. We find that experimental price dynamics are rather consistent with real world observations than with theoretical predictions.

Keywords: network externalities; demand inertia; experiments; oligopoly (search for similar items in EconPapers)
JEL-codes: C92 L13 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2004
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Related works:
Journal Article: Network Externalities, Demand Inertia and Dynamic Pricing in an Experimental Oligopoly Market (2007)
Working Paper: Network Externalities, Demand Inertia, and Dynamic Pricing in an Experimental Oligopoly Market (2004)
Working Paper: Network Externalities, Demand Inertia and Dynamic Pricing in an Experimental Oligopoly Market (2004)
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