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Hotelling-Bertrand duopoly competition under firm-specific network effects

Author

Listed:
  • Marco Tolotti

    (Dept. of Management, Università Ca' Foscari Venice)

  • Jorge Yepez

    (Dept. of Economics, Università Ca' Foscari Venice)

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-specific social recognition on market equilibria has never been addressed so far. In this paper, we consider a duopoly where competing firms are diffentiated 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 di erentiation 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 inecient trap of no di erentiation.

Suggested Citation

  • Marco Tolotti & Jorge Yepez, 2018. "Hotelling-Bertrand duopoly competition under firm-specific network effects," Working Papers 06, Venice School of Management - Department of Management, Università Ca' Foscari Venezia.
    • Handle: RePEc:vnm:wpdman:154
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    References listed on IDEAS

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    2. Renato Soeiro & Alberto Pinto, 2021. "Group network effects in price competition," Papers 2110.05891, arXiv.org.
    3. Wu, Di & Sun, Ji & Wang, Leonard F.S. & Liu, Huizhong, 2024. "Network externalities in a vertically differentiated luxury goods market," Mathematical Social Sciences, Elsevier, vol. 128(C), pages 100-109.

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    More about this item

    Keywords

    Consumer choice game; Duopoly price competition; Hotelling Location model; Network Externalities; Large Games; Social interaction.;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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