Thursday, July 21, 2011
Posted by D. Daniel Sokol
Zakaria Babutsidze- OFCE and SKEMA Business School discusses Price competition on networked duopolistic markets.
ABSTRACT: In standard Bertrand model duopolists compete on perfect markets. How- ever, not many markets are perfect. In fact most of the markets have certain structure, and this structure is known to producers. We describe the market organization by modeling consumer-producer networks and demonstrate that if this structure is known to producers implications of the price competition depart substantially from the ones predicted by standard models. In particu- lar we show that multiple pure strategy equilibria can emerge. We investigate the role of rm and consumer heterogeneity towards sustaining price dispersion as an equilibrium outcome. It turns out that if consumers are homogenous we need large dose of rm heterogeneity in order to sustain price dispersion in equilibrium. However, if consumers are heterogenous even small asymme- tries across producers imply price dispersion. It is also predicted that larger consumer heterogeneity leads to higher prices in equilibrium.