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Strategic Formation of Customer Relationship Networks

Author

Listed:
  • Sonja Brangewitz

    (University of Paderborn)

  • Claus-Jochen Haake

    (University of Paderborn)

  • Philipp Moehlmeier

    (Bielefeld University)

Abstract

We analyze the stability of networks when two intermediaries strategically form costly links to customers. We interpret these links as customer relationships that enable trade to sell a product. Equilibrium prices and equilibrium quantities on the output as well as on the input market are determined endogenously for a given network of customer relationships. We investigate in how far the substitutability of the intermediaries' products and the costs of link formation influence the intermediaries' equilibrium profits and thus have an impact on the incentives to strategically form relationships to customers. For networks with three customers we characterize locally stable networks, in particular existence is guaranteed for any degree of substitutability. Moreover for the special cases of perfect complements, independent products and perfect substitutes, local stability coincides with the stronger concept of Nash stability. Additionally, for networks with n customers we analyze stability regions for selected networks and determine their limits when n goes to infinity. It turns out that the shape of the stability regions for those networks does not significantly change compared to a setting with a small number of customers.

Suggested Citation

  • Sonja Brangewitz & Claus-Jochen Haake & Philipp Moehlmeier, 2015. "Strategic Formation of Customer Relationship Networks," Working Papers CIE 91, Paderborn University, CIE Center for International Economics.
    • Handle: RePEc:pdn:ciepap:91
    as

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    File URL: http://groups.uni-paderborn.de/wp-wiwi/RePEc/pdf/ciepap/WP91.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Network Formation; Product Differentiation; Oligopoly; Quantity Competition;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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