Hotelling-Bertrand duopoly competition under firm-specific network effects

The Institute of Economics will hold a meeting of its Seminar Series on Thursday, April 26, 2018: Marco Tolotti from University of Venice will give a seminar on "Hotelling-Bertrand duopoly competition under firm-specific network effects".

 

Social pressure is recognized to be crucial for consumer choices, also in the context of market competition. However, the impact of firm-specific social recognition on market equilibria has never been addressed so far. We consider a duopoly where competing firms are differentiated solely by the level of social (or network) externality they induce on consumers' utility. We fully characterize the subgame perfect Nash equilibria in locations, prices and market shares. Under a scenario of weak social externality, the firms opt for maximal differentiation and the one with the highest social recognition has a relative advantage in terms of profits. Surprisingly, this outcome is not persistent; excessive social recognition may lead to “adverse coordination of consumers”: the strongest firm can eventually be thrown out of the market with positive probability. Furthermore, high network externality may lead the market to a Pareto inefficient trap of no-differentiation.