Hotelling-Bertrand Duopoly Competition Under Firm-Specific Network Effects

43 Pages Posted: 27 Jul 2018

See all articles by Marco Tolotti

Marco Tolotti

Ca Foscari University of Venice - Department of Management

Jorge Yepez

Ca Foscari University of Venice - Dipartimento di Economia

Date Written: July 6, 2018

Abstract

When dealing with consumer choices, social pressure plays a crucial role; also in the context of market competition, the impact of network/social effects has been largely recognized. However, the effects of firm-specific social recognition on market equilibria has never been addressed so far. In this paper, we consider a duopoly where competing firms are differentiated solely by the level of social (or network) externality they induce on consumers' perceived utility. We fully characterize the subgame perfect Nash equilibria in locations, prices and market shares. Under a scenario of weak social externality, the firms opt for maximal differentiation and the one with the highest social recognition has a relative advantage in terms of profits. Surprisingly, this outcome is not persistent; excessive social recognition may lead to adverse coordination of consumers: the strongest firm can eventually be thrown out of the market with positive probability. This scenario is related to a Pareto inefficient trap of no differentiation.

Keywords: Consumer Choice Game, Duopoly Price Competition, Hotelling Location Model, Network Externalities, Large Games, Social Interaction

JEL Classification: L13, C72, C63, D71

Suggested Citation

Tolotti, Marco and Yepez, Jorge, Hotelling-Bertrand Duopoly Competition Under Firm-Specific Network Effects (July 6, 2018). Department of Management, Università Ca' Foscari Venezia Working Paper No. 2018 / 06, Available at SSRN: https://ssrn.com/abstract=3209218 or http://dx.doi.org/10.2139/ssrn.3209218

Marco Tolotti (Contact Author)

Ca Foscari University of Venice - Department of Management ( email )

San Giobbe, Cannaregio 873
Venice, 30121
Italy

Jorge Yepez

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

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