Price Competition with Network Spillovers: Entry, Cohesiveness and Interoperability

Yifan Zhang

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Many products generate network spillovers: a user’s value of such a product is higher when her contacts also use it. This paper studies competition between an entrant and an incumbent selling such products. In the model, the firms set personalised prices (for example, via targeted discounts), and consumers embedded in a network choose which product to buy. The pattern of equilibrium consumption is shown to be the same as if firms were to charge a price of 0 to all consumers. The equilibrium prices reflect incumbent advantage and depend on the network structure in nuanced ways. The equilibrium characterisation provides the foundation for studying the profitability of entry and the effects of anti-trust tools in such markets. A key structural feature of the network is found to be cohesiveness – the extent to which consumers within a group are densely connected to one another. Firms are more likely to enter if they have a consumer base that is cohesive and influential. While regulators use interoperability as a tool to improve market contestability, I show that interoperability can actually discourage entry depending on the cohesiveness of consumer bases.

Date: 2026-04-17
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.econ.cam.ac.uk/sites/default/files/pub ... pe-pdfs/cwpe2634.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2634

Access Statistics for this paper

More papers in Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Bibliographic data for series maintained by Jake Dyer ().