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Modeling the Impact of Consumer Interactions in Technology Markets
Judy Frels, Debra Heisler, James Reggia and Hans Joachim Schuetze

In network markets, the utility consumers gain from a product increases with the number of other consumers adopting that product. We examine the evolution of such markets using stochastic cellular automata (CA) models to simulate consumer adoption and pricing strategy decisions. Two firms, which lie outside of and interact with the CA model, sponsor incompatible technologies and compete for market dominance using penetration pricing strategies. We find that the importance of the network to the consumer is critical in determining the financial success of enacting pricing strategies: penetration pricing when network externalities are only moderately important to the consumer can be disastrous. We also find that while an inferior technology may gain substantial market share by price-cutting, it is not likely to gain financial rewards. Finally, we find that if a penetration pricing strategy is to be enacted, more aggressive strategies with larger price cuts lead to greater success.

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