DP14495 Network Topology and Market Structure

Author(s): Ying-Ju Chen, Yves Zenou, Junjie Zhou
Publication Date: March 2020
Keyword(s): competitive pricing, Entry, market structure, optimal network structure
JEL(s): D43, D85, L13, L14
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14495

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.