Oz Shy†

Using two standard location models, we investigate price competition and diver-gence from optimal product differentiation when consumer preferences are influenced by the number of consumers purchasing the same brand or shopping at the same store. Negative network effects tend to lessen competition and increase prices whereas pos-itive network effects (bandwagon effects) make competition fiercer and lead to lower prices. Furthermore, in the duopoly case, an increase in the total population may hurt the clients of a store despite the fact that they benefit from price cuts. Finally, under free entry, increasing the population may lead to a decrease in the equilibrium num-ber of stores and always enlarges the divergence between the equilibrium and optimal numbers of stores