Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Thursday, December 27, 2012

Competing for Customers in a Social Network

Posted by D. Daniel Sokol

Pradeep Dubey (Department of Economics, Stony Brook University), Rahul Garg (Opera Solutions, INDIA) and Bernard De Meyer (Cermsem, Univesit´e Paris 1, Paris, FRANCE) explain Competing for Customers in a Social Network.

ABSTRACT: There are many situations in which a customer’s proclivity to buy the product of any firm depends not only on the classical attributes of the product such as its price and quality, but also on who else is buying the same product. Under quite general circumstances, it turns out that customers’ influence on each other dynamically converges to a steady state. Thus we can model these situations as games in which firms compete for customers located in a “social network”. A canonical example is provided by competition for advertisement on the web. Nash Equilibrium (NE) in pure strategies exist in general. In the quasi-linear version of the model, NE turn out to be unique and can be precisely characterized. If there are no a priori biases between customers and firms, then there is a cut-off level above which high cost firms are blockaded at an NE, while the rest compete uniformly throughout the network. Otherwise there ! is a tendency towards regionalization, with firms dominating disjoint territories. We also explore the relation between the connectivity of a customer and the money firms spend on him. This relation becomes particularly transparent when externalities are dominant: NE can be characterized in terms of the invariant measures on the recurrent classes of the Markov chain underlying the social network. Finally we consider convex (instead of linear) cost functions for the firms. Here NE need not be unique as we show via an example. But uniqueness is restored if there is enough competition between firms or if their valuations of clients are anonymous.

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