The impact of network topology and market structure on pricing

Abstract

We develop a two-stage oligopolistic network competition model where, first, firms simultaneously determine their prices, and, second, consumers connected through a network determine their consumption. We show that firms price-discriminate consumers based on the consumer's network position. Denser networks (i.e., network topology) reduce prices, whereas increased competition (i.e., market structure) reduces prices only when competition is weak. However, the prices charged for the most influential consumers can increase with the number of firms when competition is very fierce and when there are strong network externalities. We also show that increasing competition always leads to lower firm profits, whereas equilibrium profits respond to the number of firms more sensitively when the network is denser or the externalities parameter is larger. Finally, we study the effects of network topology and market structure on price dispersion and determine the optimal network structure based on the perspective of both firms and consumers. We also extend the baseline model to allow for asymmetric firms and product compatibility.