Working Paper: CEPR ID: DP6687
Authors: Lus M. B. Cabral
Abstract: I consider a dynamic model of competition between two proprietary networks. Consumers die and are replaced with a constant hazard rate. Firms compete for new consumers to join their network by offering network entry prices (which may be below cost). New consumers have a privately known preference for each network. Upon joining a network, in each period consumers enjoy a benefit which is increasing in network size during that period. Firms receive revenues from new consumers as well as from consumers already belonging to their network.Using a combination of analytical and numerical methods, I discuss various properties of the equilibrium. I show that very small or very large networks tend to price higher than networks of intermediate size. I also show that, around symmetric states, the gap between the large and the small network tends to widen (increasing dominance) whereas the opposite is true (reversion to the mean) around very asymmetric states.
Keywords: dynamic price competition; network effects
JEL Codes: L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Network Size (D85) | Pricing Strategies (D49) |
| Network Size (D85) | Attractiveness to Consumers (L15) |
| Attractiveness to Consumers (L15) | Pricing Strategies (D49) |
| Larger Firms (L25) | Pricing Strategies (D49) |
| Network Size (D85) | Market Share Dynamics (D49) |
| Market Share Dynamics (D49) | Attractiveness to Consumers (L15) |