Working Paper: CEPR ID: DP14495
Authors: Yingju Chen; Yves Zenou; Junjie Zhou
Abstract: We develop a two-stage oligopolistic network competition model where, first, firms simultaneously determine their prices and,then, users connected through a network determine their product's consumption. We show that denser networks (network topology)reduce prices and that a higher number of firms (market structure) reduces prices only when competition is weak. However, the pricefor the most influential users can increase with the number of firms when competition is very fierce and when there are enoughnetwork externalities. We also show that increasing competition always leads to a lower firm's profit while increasing networkdensity leads to a clockwise rotation of the profit curve as a function of the number of firms. Finally, we study the effect ofnetwork topology and market structure on price dispersion and determine the optimal network structure from the perspective ofboth firms and users.
Keywords: competitive pricing; entry; market structure; optimal network structure
JEL Codes: D43; D85; L13; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Denser networks (C45) | Lower prices (D49) |
| Higher number of firms (L25) | Lower prices (D49) |
| Higher number of firms (L25) | Higher prices for influential users (P22) |
| Increasing competition (L13) | Lower firms' profits (D21) |
| Greater network density (D85) | Clockwise rotation of profit curve relative to number of firms (D21) |
| Market structure and network topology (D85) | Price dispersion (L11) |
| Intermediate number of firms (D21) | Maximum price dispersion (D49) |