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Hotelling-Bertrand duopoly competition under firrm-specific network e effects

Marco Tolotti () and Jorge Yepez ()
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Jorge Yepez: Dept. of Economics, Università Ca' Foscari Venice

No 6, Working Papers from Department of Management, Università Ca' Foscari Venezia

Abstract: When dealing with consumer choices, social pressure plays a crucial role; also in the context of market competition, the impact of network/social effects has been largely recognized. However, the effects of firm-specifc social recognition on market equilibria has never been addressed so far. In this paper, we consider a duopoly where competing firms are differentiated solely by the level of social (or network) externality they induce on consumers' perceived utility. We fully characterize the subgame perfect Nash equilibria in locations, prices and market shares. Under a scenario of weak social externality, the firms opt for maximal differentiation and the one with the highest social recognition has a relative advantage in terms of profits. Surprisingly, this outcome is not persistent; excessive social recognition may lead to adverse coordination of consumers: the strongest firm can eventually be thrown out of the market with positive probability. This scenario is related to a Pareto inefficient trap of no differentiation.

Keywords: Consumer choice game; Duopoly price competition; Hotelling Location model; Network Externalities; Large Games; Social interaction (search for similar items in EconPapers)
JEL-codes: C63 C72 D71 L13 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2018-06
New Economics Papers: this item is included in nep-com, nep-gth and nep-ind
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Journal Article: Hotelling-Bertrand duopoly competition under firm-specific network effects (2020) Downloads
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