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Hotelling's location model with negative network externalities

15 November 2019 at 12:00 PM - 1:00 PM

Room 304a, Campus on Viale Romania, 32

Speaker: Marc Schröder, RWTH Aachen

Abstract:

We study a variation of Hotelling’s location model in which consumers choose between firms based on travel distances as well as the number of consumers visiting each firm. The model in which the network externality is the same for all firms was proposed by Kohlberg (1983), who claims that no equilibrium exists for more than two firms. We assume the network effects to be linear and, in contrast to the claim in Kohlberg (1983), derive a condition under which a subgame perfect Nash equilibrium exists for four and six firms. Moreover, we show that for more than two firms the equilibrium locations of the firms are different from the equilibrium locations in Hotelling’s location model. Our results suggest that a subgame perfect Nash equilibrium exists if and only if the number of firms is even. We also provide examples of subgame perfect equilibria in which the network externality is different for some of the firms.