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Dynamic Price Competition with Network Effects

Posted: 25 Feb 2010  

Luis Cabral

IESE Business School - University of Navarra

Date Written: January 1, 2010

Abstract

I consider a dynamic model of competition between two proprietary networks. Consumers die and are replaced with a constant hazard rate; and firms compete for new consumers to join their network by offering network entry prices. I derive a series of results pertaining to: a) existence and uniqueness of symmetric equilibria, b) monotonicity of the pricing function (e.g., larger networks set higher prices), c) network size dynamics (increasing dominance vs. reversion to the mean), and d) firm value (how it varies with network effects). Finally, I apply my general framework to the study of termination charges in wireless telecommunications. I consider various forms of regulation and examine their impact on firm profits and market share dynamics.

Suggested Citation

Cabral, Luis, Dynamic Price Competition with Network Effects (January 1, 2010). IESE Business School Working Paper No. 843. Available at SSRN: https://ssrn.com/abstract=1557584 or http://dx.doi.org/10.2139/ssrn.1557584

Luis Cabral (Contact Author)

IESE Business School - University of Navarra ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

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