Price competition and node-linkage association

Abstract

This paper presents a short-run model of price competition for markets defined as networks (node-linkage associations) under perfectly inelastic consumer demand. Analytical and simulation analyses show an inverse relationship between firms' equilibrium price schedules and the number of directly connected rival firms. As the degree of network connectivity increases, holding the size of the overall market constant, average equilibrium mill prices tend to decrease at a decreasing rate. This implies that the intensity of competition in a network increases as the network becomes more fully connected, and equilibrium price levels converge at some theoretical minimum that is specific to the prevailing market conditions. Price-connectivity relations are shown to be highly sensitive to network structure and the distribution of price conjectural parameters. In addition, the paper briefly discusses the welfare implications of price reductions from an accessible and cost-efficient firm in a network.