On Price Elasticities in the Presence of Network Effects

16 Pages Posted: 2 Mar 2015 Last revised: 5 Apr 2015

See all articles by Zhiyuan Chen

Zhiyuan Chen

Wuhan University - School of Economics and Management

Xiaoying Liang

City University of Hong Kong - Department of Management Sciences

Lei Xie

Shanghai University of Finance and Economics - School of International Business Administration

Houmin Yan

City University of Hong Kong (CityU) - Faculty of Business

Date Written: April 5, 2015

Abstract

Price elasticities characterize the effect of price changes on demands in a multi-product context. We demonstrate and explain two perverse properties concerning price elasticities in the presence of network effects when three or more substitutable products are involved: Cross-price elasticities are not necessarily positive, and own-price elasticities are not necessarily negative. These findings imply that the consequences of firms' price moves in a competitive market when network effects are in play deserve further scrutiny.

Keywords: cross-price elasticity, own-price elasticity, network effects, substitutes

JEL Classification: D43, L11, L13, L14

Suggested Citation

Chen, Zhiyuan and Liang, Xiaoying and Xie, Lei and Yan, Houmin, On Price Elasticities in the Presence of Network Effects (April 5, 2015). Available at SSRN: https://ssrn.com/abstract=2571872 or http://dx.doi.org/10.2139/ssrn.2571872

Zhiyuan Chen

Wuhan University - School of Economics and Management ( email )

Wu Han, Hu-Bai 430072
China

Xiaoying Liang (Contact Author)

City University of Hong Kong - Department of Management Sciences ( email )

Kowloon Tong, Kowloon
Hong Kong
34428647 (Phone)

Lei Xie

Shanghai University of Finance and Economics - School of International Business Administration ( email )

777 Guo-ding Road
Shanghai, 200433
China

Houmin Yan

City University of Hong Kong (CityU) - Faculty of Business ( email )

Tat Chee Avenue, Kowloon, Hong Kong SAR
Kowloon
Hong Kong

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