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Product Differentiation in the Presence of Positive and Negative Network Effects

Author

Listed:
  • Navon, Ami
  • Shy, Oz
  • Thisse, Jacques-François
Abstract
Using two standard location models, we investigate price competition and divergence from optimal product differentiation when consumer preferences are influenced by the number of consumers purchasing the same brand or shopping at the same store. Negative network effects tend to lessen competition and increase prices whereas positive network effects (bandwagon effects) make competition fiercer and lead to lower prices. Furthermore, in the duopoly case, an increase in total population may adversly affect the clients of a store despite the fact that they benefit from price cuts. Finally, under free entry, increasing the population may lead to a reduction in the equilibrium number of stores and always increases the divergence between the equilibrium and optimal numbers of stores.

Suggested Citation

  • Navon, Ami & Shy, Oz & Thisse, Jacques-François, 1995. "Product Differentiation in the Presence of Positive and Negative Network Effects," CEPR Discussion Papers 1306, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1306
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    Citations

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    Cited by:

    1. Hans Peters & Marc Schröder & Dries Vermeulen, 2018. "Hotelling’s location model with negative network externalities," International Journal of Game Theory, Springer;Game Theory Society, vol. 47(3), pages 811-837, September.
    2. Chathurga Karunanayake & Lalithasiri Gunaruwan, 2019. "Exploring the Inter-play between the Decorative Consumption Dimensions: A deep dive into Conspicuousness and Snobbism through cases of Wristwatches and Houses," International Journal of Business and Social Research, LAR Center Press, vol. 9(5), pages 21-33, May.
    3. Bita Hajihashemi & Amin Sayedi & Jeffrey D. Shulman, 2022. "The Perils of Personalized Pricing with Network Effects," Marketing Science, INFORMS, vol. 41(3), pages 477-500, May.
    4. Jacob, Jagan, 2020. "Should competing firms cooperate to reduce congestion?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 142(C).
    5. Baake, Pio & Boom, Anette, 2001. "Vertical product differentiation, network externalities, and compatibility decisions," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 267-284, January.
    6. Chathurga Karunanayake & Lalithasiri Gunaruwan, 2019. "Exploring the Inter-play between the Decorative Consumption Dimensions: A deep dive into Conspicuousness and Snobbism through cases of Wristwatches and Houses," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 9(5), pages 21-33, May.
    7. Griva, Krina & Vettas, Nikolaos, 2011. "Price competition in a differentiated products duopoly under network effects," Information Economics and Policy, Elsevier, vol. 23(1), pages 85-97, March.
    8. Andreea Cosnita‐Langlais & Alexander Rasch, 2023. "Horizontal mergers, cost savings, and network effects," Bulletin of Economic Research, Wiley Blackwell, vol. 75(1), pages 65-82, January.
    9. Rainer Nitsche, 2002. "On the Effectiveness of Anit-Predation Rules," CIG Working Papers FS IV 02-12, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    10. Ourania Karakosta & Eleftherios Zacharias, 2023. "Optimal taxation with positional considerations," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(2), pages 342-358, April.
    11. Di Cintio, Marco, 2007. "A note on the Hotelling principle of minimum differentiation: Imitation and crowd," Research in Economics, Elsevier, vol. 61(3), pages 122-129, September.
    12. Hend Ghazzai & Rim Lahmandi-Ayed, 2006. "Vertical differentiation, network externalities and compatibility decisions: an alternative approach," Post-Print halshs-00111166, HAL.

    More about this item

    Keywords

    Location; Network Effects; Network Externalities; Product Differentiation;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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