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Network Externalities, Demand Inertia and Dynamic Pricing in an Experimental Oligopoly Market

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  • Ralph-C Bayer

    (School of Economics, University of Adelaide)

  • Mickey Chan

    (School of Economics, University of Adelaide)

Abstract

This paper analyses dynamic pricing in markets with network externalities. Network externalities imply demand inertia, because the size of a network increases the usefulness of the product for consumers. Since past sales increase current demand, firms have an incentive to set low introductory prices to be able to increase prices as their networks grow. However, in reality we observe decreasing prices. This could be due to other factors dominating the network effects. We use an experimental duopoly market with demand inertia to isolate the e¤ect of network externalities. We find that experimental price dynamics are rather consistent with real world observations than with theoretical predictions.

Suggested Citation

  • Ralph-C Bayer & Mickey Chan, 2004. "Network Externalities, Demand Inertia and Dynamic Pricing in an Experimental Oligopoly Market," School of Economics and Public Policy Working Papers 2004-08, University of Adelaide, School of Economics and Public Policy.
    • Handle: RePEc:adl:wpaper:2004-08
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    References listed on IDEAS

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    Cited by:

    1. Doganoglu, Toker & Wright, Julian, 2006. "Multihoming and compatibility," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 45-67, January.
    2. Tavasoli, Ali & Fazli, Mehrdad & Ardjmand, Ehsan & Young, William A. & Shakeri, Heman, 2023. "Competitive pricing under local network effects," European Journal of Operational Research, Elsevier, vol. 311(2), pages 545-566.
    3. Bayer, Ralph-C., 2010. "Intertemporal price discrimination and competition," Journal of Economic Behavior & Organization, Elsevier, vol. 73(2), pages 273-293, February.
    4. Wisnicki, Bartlomiej, 2022. "Consumer inertia fosters product quality," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 96(C).

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    More about this item

    Keywords

    network externalities; demand inertia; experiments; oligopoly;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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