Duopoly Competition with Network Effects in Discrete Choice Models

Operations Research

90 Pages Posted: 29 Sep 2017 Last revised: 27 Aug 2020

See all articles by Ningyuan Chen

Ningyuan Chen

University of Toronto at Mississauga - Department of Management; University of Toronto - Rotman School of Management

Ying-Ju Chen

Hong Kong University of Science & Technology (HKUST) - Department of Information Systems, Business Statistics and Operations Management

Date Written: September 27, 2017

Abstract

We consider two firms selling products to a market of network-connected customers. Each firm is selling one product and the two products are substitutable. The customers make purchases based on the multinomial logit model and the firms compete for their purchasing probabilities. We characterize possible Nash equilibria for homogeneous network interactions and identical firms: when the network effects are weak, there is a symmetric equilibrium that the two firms evenly split the market; when the network effects are strong, there exist two asymmetric equilibria additionally, in which one firm dominates the market; interestingly, when the product quality is low and the network effects are neither too weak nor too strong, the resulting market equilibrium is never symmetric although the firms are ex ante symmetric.

We extend these results along multiple directions. First, when the products have heterogeneous qualities, the firm selling inferior product can still retain market dominance in equilibrium due to the strong network effects. Second, when the network effects are heterogeneous, customers with higher social influences or larger price sensitivities are more likely to purchase either product in the symmetric equilibrium. Third, when the network consists of two communities, market segmentation may arise. Fourth, we extend to the dynamic game when the network effects build up over time to explain the first-mover advantage.

Keywords: duopoly competition, network effects, multinomial logit model, Cournot competition

Suggested Citation

Chen, Ningyuan and Chen, Ying-Ju, Duopoly Competition with Network Effects in Discrete Choice Models (September 27, 2017). Operations Research, Available at SSRN: https://ssrn.com/abstract=3044192 or http://dx.doi.org/10.2139/ssrn.3044192

Ningyuan Chen (Contact Author)

University of Toronto at Mississauga - Department of Management ( email )


Canada

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada

Ying-Ju Chen

Hong Kong University of Science & Technology (HKUST) - Department of Information Systems, Business Statistics and Operations Management ( email )

Clear Water Bay
Kowloon
Hong Kong

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