Thursday, November 29, 2018

Hotelling-Bertrand duopoly competition under firm-specific network effects

Marco Tolotti (Dept. of Management, Università Ca' Foscari Venice) and Jorge Yepez (Dept. of Economics, Università Ca' Foscari Venice) theorize about Hotelling-Bertrand duopoly competition under firm-specific network effects.

Abstract: When dealing with consumer choices, social pressure plays a crucial role; also in the context of market competition, the impact of network/social effects has been largely recognized. However, the effects of firm-specifc social recognition on market equilibria has never been addressed so far. In this paper, we consider a duopoly where competing firms are differentiated solely by the level of social (or network) externality they induce on consumers' perceived utility. We fully characterize the subgame perfect Nash equilibria in locations, prices and market shares. Under a scenario of weak social externality, the firms opt for maximal differentiation and the one with the highest social recognition has a relative advantage in terms of profits. Surprisingly, this outcome is not persistent; excessive social recognition may lead to adverse coordination of consumers: the strongest firm can eventually be thrown out of the market with positive probability. This scenario is related to a Pareto inefficient trap of no differentiation.

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