Network Externalities, Demand Inertia and Dynamic Pricing in an Experimental Oligopoly Market*

Abstract

This paper analyses dynamic pricing in markets with network externalities. Network externalities imply demand inertia, because the size of a network increases the usefulness of the product for consumers. Because past sales increase current demand, firms have an incentive to set low introductory prices to be able to increase prices as their networks grow. However, in reality we observe decreasing prices. This could be due to other factors dominating the network effects. We use an experimental duopoly market with demand inertia to isolate the effect of network externalities. We find that experimental prices are consistent with real world observations rather than with theoretical predictions.

The optimal pricing model of online knowledge payment goods in C2C sharing economy

“…This relation depends on the market structure (monopoly vs oligopoly) and on the type of externalities (consumption versus price). Bayer and Chan (2007) analyze dynamic pricing in markets with network externalities by using an experimental duopoly market with demand inertia to isolate the effect of network externalities. Ehsani et al (2012) study the optimal pricing strategy for profit maximization in presence of network externalities.…”

Firms’ Strategic Pricing and Network Externalities

“…In recent years, studies on network externalities have successively emerged. Bensaid and Lesne [2], Doganoglu [3], Li and Chen [4], Hajji et al [5], Bayer and Chan [6], and Li et al [7] studied the dynamic pricing problem under network externality. ey introduced the network externality intensity coefficient to characterize the size of the network externality so that the network externality can be used for strategic pricing.…”