Competitive pricing strategies in social networks

Yves Zenou, Ying-Ju Chen and Junjie Zhou

No 10857, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study pricing strategies of competing firms who sell heterogeneous products to a group of customers in a social network. Goods are substitutes and each customer gains network externalities from her neighbors who consume the same products. We show that there is a unique subgame-perfect equilibrium where, first, firms choose the prices of each good for each consumer, and, then, individuals decide their consumption of the goods. We also fully characterize the equilibrium prices for any network structure, and relate these equilibrium outcomes to the familiar Katz-Bonacich network centrality measures. Contrary to the monopoly case, the equilibrium price of a customer not only depends on her own characteristics but also on others' characteristics. We show that firms price discriminate and charge lower prices to more central consumers. This means that more central consumers obtain a larger discount because of their impact in terms of consumption on their neighbors. We also show that the firms' equilibrium profits can decrease when either the network becomes denser or network effects are higher.

Keywords: Competition; Differentiated products; Pricing; Social Networks (search for similar items in EconPapers)
JEL-codes: D43 D85 L13 L14 (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-com, nep-mic, nep-mkt, nep-net, nep-soc and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
https://cepr.org/publications/DP10857 (application/pdf)

Related works:
Journal Article: Competitive pricing strategies in social networks (2018)
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:cpr:ceprdp:10857

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP10857

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().