Working Paper: CEPR ID: DP10862
Authors: Philip Ushchev; Yves Zenou
Abstract: We develop a product-differentiated model where the product space is a network defined as a set of varieties (nodes) linked by their degree of substituabilities (edges). In this network, we also locate consumers so that the location of each consumer (node) corresponds to her "ideal" variety. We show that there exists a unique Nash equilibrium in the price game among firms. Equilibrium prices are determined by firms' weighted Bonacich centralities and the average willingness to pay across consumers. They both hinge on the network structure of the firm-product space. We also investigate how local product differentiation and the spatial discount factor affect the equilibrium prices. We show that these effects non-trivially depend on the network structure. In particular, we find that, in a star-shaped network, the firm located in the star node does not always enjoy higher monopoly power than the peripheral firms.
Keywords: Monopolistic Competition; Networks; Product Variety; Spatial Competition
JEL Codes: D43; L11; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| weighted Bonacich centralities (Z13) | equilibrium prices (D41) |
| average willingness to pay (D69) | equilibrium prices (D41) |
| product differentiation (L15) | equilibrium prices (D41) |
| spatial discount factor (D15) | equilibrium prices (D41) |
| network structure (D85) | equilibrium prices (D41) |
| competition effect (D41) | equilibrium prices (D41) |
| local product differentiation (L15) | equilibrium prices (D41) |