Network Topology and Market Structure

49 Pages Posted: 25 Mar 2020

See all articles by Ying-Ju Chen

Ying-Ju Chen

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

Yves Zenou

Stockholm University; Monash University - Department of Economics; Research Institute of Industrial Economics (IUI); IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Junjie Zhou

Tsinghua University - Tsinghua University School of Economics and Management

Date Written: March 2020

Abstract

We develop a two-stage oligopolistic network competition model where, first, firms simultaneously determine their prices and, then, users connected through a network determine their product's consumption. We show that denser networks (network topology) reduce prices and that a higher number of firms (market structure) reduces prices only when competition is weak. However, the price for the most influential users can increase with the number of firms when competition is very fierce and when there are enough network externalities. We also show that increasing competition always leads to a lower firm's profit while increasing network density leads to a clockwise rotation of the profit curve as a function of the number of firms. Finally, we study the effect of network topology and market structure on price dispersion and determine the optimal network structure from the perspective of both firms and users.

Keywords: competitive pricing, Entry, market structure, optimal network structure

JEL Classification: D43, D85, L13, L14

Suggested Citation

Chen, Ying-Ju and Zenou, Yves and Zenou, Yves and Zhou, Junjie, Network Topology and Market Structure (March 2020). CEPR Discussion Paper No. DP14495, Available at SSRN: https://ssrn.com/abstract=3560303

Ying-Ju Chen (Contact Author)

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

Clear Water Bay
Kowloon
Hong Kong

Yves Zenou

Monash University - Department of Economics ( email )

Australia

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Research Institute of Industrial Economics (IUI) ( email )

P.O. Box 5501
S-114 85 Stockholm
Sweden

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Junjie Zhou

Tsinghua University - Tsinghua University School of Economics and Management ( email )

Beijing
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
433
PlumX Metrics