COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1591

Competing for Customers in a Social Network

Pradeep Dubey, Rahul Garg and Bernard De Meyer

November 2006

There are many situations in which a customer's proclivity to buy the product of any firm depends not only on the classical attributes oft he product such as its price and quality, but also on who else is buying the same product. We model these situations as games in which firms compete for customers located in a "social network." Nash Equilibrium (NE) in pure strategies exist in general. In the quasi-linear version of the model, NE turn out to be unique and can be precisely characterized. If there are no a priori biases between customers and firms, then there is a cut-off level above which high cost firms are blockaded at an NE, while the rest compete uniformly throughout the network.

We also explore the relation between the connectivity of a customer and the money firms spend on him. This relation becomes particularly transparent when externalities are dominant: NE can be characterized in terms of the invariant measures on the recurrent classes of the Markov chain underlying the social network.

Finally we consider convex (instead of linear) cost functions for the firms. Here NE need not be unique as we show via an example. But uniqueness is restored if there is enough competition between firms or if their valuations of clients are anonymous.

JEL Classification Numbers: A14, C72, D11, D21, L1, L2

Keywords: Social network, Game theory, Nash equilibrium, Competition game on a social network