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2635. Optimal Pricing with Customer Heterogeneity in Duopoly Markets: Insights from Network Effects

Invited abstract in session TC-59: Pricing Strategies, stream Pricing and Revenue Management.

Tuesday, 12:30-14:00
Room: S08 (building: 101)

Authors (first author is the speaker)

1. Kimitoshi Sato
Kanagawa university
2. Nako Iwaji
Kanagawa university

Abstract

This study considers a pricing problem in a duopoly market where customers have different preferences with respect to congestion. Customers choose a product based on the quality and price of the product sold by each firm, as well as the degree of congestion (aggregate demand) for that product. Customers who prefer congestion are more likely to choose a store if the store is more congested in order to obtain utility. Such a phenomenon is called a positive network effect (customer type P). On the other hand, customers who do not like congestion will use a store when it is less congested. This is called a negative network effect (customer type N). In this study, we formulate a price competition model under a linear demand function in order to clarify how the intensity of the network effect and the ratio of customer types affect competition among firms. Our analysis reveals that The equilibrium price increases with the number of type P, and the maximum revenue of both firms increases accordingly. The higher the intensity difference between positive and negative network effects, the higher the profit of the firm with good quality increases and that of the firm with poor quality decreases. Furthermore, comparing the case where both firms jointly determine prices and the competitive situation, we show that when the ratio of type N and the negative network effect are strong, the profit from competition exceeds that of joint.

Keywords

Status: accepted

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