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Dynamic Price Competition with Consumption Externalities

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  • Toker Doganoglu

    (Christian Albrechts University at Kiel)

Abstract

The dynamic price competition in a horizontally differentiated duopoly when consumers value previous market shares is analyzed. The conditions for the existence of stable Markov-Perfect Equilibrium (MPE) in linear strategies are established. When they exist, the optimal pricing policies suggest that a firm with a higher previous market share charges a higher price, all else equal. It is possible to observe pricing below cost for some periods. In the steady state, the MPE leads to a more competitive outcome (lower prices) than the case where there are no consumption externalities. The model can produce outcomes where the steady state is reached very slowly which provides an alternative explanation for slow emergence of competition when entrants face an established incumbent: It may be due to persistence in consumer tastes.

Suggested Citation

  • Toker Doganoglu, 2003. "Dynamic Price Competition with Consumption Externalities," Netnomics, Springer, vol. 5(1), pages 43-69, May.
    • Handle: RePEc:kap:netnom:v:5:y:2003:i:1:d:10.1023_a:1024994117734
    DOI: 10.1023/A:1024994117734
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    3. Luís Cabral, 2011. "Dynamic Price Competition with Network Effects," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(1), pages 83-111.
    4. Jullien, Bruno & Halaburda, Hanna & Yehezkel, Yaron, 2016. "Dynamic Competition with Network Externalities: Why History Matters," CEPR Discussion Papers 11205, C.E.P.R. Discussion Papers.
    5. Hanna Halaburda & Bruno Jullien & Yaron Yehezkel, 2020. "Dynamic competition with network externalities: how history matters," RAND Journal of Economics, RAND Corporation, vol. 51(1), pages 3-31, March.
    6. Hiroshi Kitamura, 2007. "Capacity Expansion in Markets with Intertemporal Consumption Externalities," Discussion Papers in Economics and Business 07-11, Osaka University, Graduate School of Economics.
    7. Bruno Jullien & Alessandro Pavan & Marc Rysman, 2021. "Two-sided markets, pricing, and network effects," Post-Print hal-03828345, HAL.
    8. Rabah Amir & Jean Gabszewicz & Joana Resende, 2014. "Thematic Clubs and the Supremacy of Network Externalities," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(5), pages 706-729, October.
    9. Laussel, Didier & Van Long, Ngo & Resende, Joana, 2015. "Network effects, aftermarkets and the Coase conjecture: A dynamic Markovian approach," International Journal of Industrial Organization, Elsevier, vol. 41(C), pages 84-96.
    10. Christian Dahl Winther, 2007. "Optimal research effort and product differentiation in network industries," Economics Working Papers 2007-19, Department of Economics and Business Economics, Aarhus University.
    11. Hattori, Keisuke & Zennyo, Yusuke, 2018. "Heterogeneous Consumer Expectations and Monopoly Pricing for Durables with Network Externalities," MPRA Paper 89893, University Library of Munich, Germany, revised 08 Nov 2018.
    12. Dengwang Tang & Hamidreza Tavafoghi & Vijay Subramanian & Ashutosh Nayyar & Demosthenis Teneketzis, 2023. "Dynamic Games Among Teams with Delayed Intra-Team Information Sharing," Dynamic Games and Applications, Springer, vol. 13(1), pages 353-411, March.
    13. Hattori, Keisuke & Zennyo, Yusuke, 2018. "Pricing and Diffusion of Durables with Network Externalities," MPRA Paper 86203, University Library of Munich, Germany.
    14. Francesca Di Pillo & Livio Cricelli & Massimo Gastaldi & Nathan Levialdi, 2010. "Asymmetry in mobile access charges: is it an effective regulatory measure?," Netnomics, Springer, vol. 11(3), pages 291-314, October.
    15. Sjaak Hurkens & Ángel L. López, 2014. "Mobile Termination, Network Externalities and Consumer Expectations," Economic Journal, Royal Economic Society, vol. 124(579), pages 1005-1039, September.
    16. Xin Geng & Xiaomeng Guo & Guang Xiao, 2022. "Impact of Social Interactions on Duopoly Competition with Quality Considerations," Management Science, INFORMS, vol. 68(2), pages 941-959, February.
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    19. Hiroshi Kitamura, 2010. "Capacity Expansion In Markets With Inter‐Temporal Consumption Externalities," Australian Economic Papers, Wiley Blackwell, vol. 49(2), pages 127-148, June.

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