Abstract: Noticing the influences of friends on consumers purchasing decisions, the impact of ‘small world' social network on price competition in a duopoly hotelling model was studied. A multi-agent based modeling approach was proposed to represent the consumers' decisions, which related to their connected friends in a social network, as well as the firms' pricing decisions. Simulation results reveal that the ‘small world' social network has a significant impact on the competing firms' pricing decisions. In specific, with the increasing number of consumers who are impacted by their friends, or the increasing likelihood of following friends' decisions, consumers then behave less rational. Both firms benefit from such bounded rationality and gain profits by raising their selling prices. In addition, one firm may benefit more than the other due to the network structure of the ‘small world'. As a result, policies of sales effort investment are also different for the two competitors.

Key words: hotelling model, small world network, consumer behavior, sale effort, multi-agent modeling and simulation