Discussion paper

DP14495 Network Topology and Market Structure

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.


Chen, Y, Y Zenou and J Zhou (2020), ‘DP14495 Network Topology and Market Structure‘, CEPR Discussion Paper No. 14495. CEPR Press, Paris & London. https://cepr.org/publications/dp14495