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Firms’ Strategic Pricing and Network Externalities

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  • Jianheng Zhou
  • Rongfei Xu

Abstract

For the sale of a product with network externalities, a Stackelberg model involving an incumbent and an entrant is developed considering the impact of three strategic decision-making modes of the incumbent and consumers on the pricing, market share, and profit of firms. In addition, the impact of consumers’ strategic behaviours on firms’ pricing decisions and how firms respond to strategic customers is discussed. The results show that, in the (strategic firm facing strategic consumers) decision-making mode, the incumbent will implement long-term pricing and finally obtain the maximum profit, while as a follower of the incumbent, the entrant will also obtain the maximum profit in the mode. In the (nonstrategic firm facing strategic consumers) decision-making mode, the strategy of consumers seriously weakens the decision-making behaviour of the incumbent and causes the incumbent to obtain the lowest profit, but at the same time, the competitiveness of the entrant is enhanced to a certain extent, thereby rendering its profit higher than that in the (nonstrategic firm facing nonstrategic consumers) decision-making mode.

Suggested Citation

  • Jianheng Zhou & Rongfei Xu, 2020. "Firms’ Strategic Pricing and Network Externalities," Mathematical Problems in Engineering, Hindawi, vol. 2020, pages 1-11, February.
    • Handle: RePEc:hin:jnlmpe:2859073
    DOI: 10.1155/2020/2859073
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