Spatial equilibrium in a duopoly under asymmetric network externalities

Abstract

Network externalities are present in a variety of applications of spatial and network economics. For example, in energy networks the consumers often are assumed to benefit from a large number of other households using the same type of energy. In general, different firms can be asymmetric in terms of their network externality effect. This paper addresses the role of asymmetric network externalities to the existence and nature of spatial equilibrium in a duopoly with a quadratic transport cost. The study is based on a discrete choice Hotelling-type model where non-cooperative suppliers decide on prices and locations. The model has a pure strategy subgame-perfect equilibrium with maximal differentiation for a wide range of the parameter values of the asymmetric (or symmetric) network externalities. The model is applied to study equilibrium in an energy market consisting of a non-renewable energy producer and a renewable energy producer.