Discrimination through "Versioning" with Advertising in Random Networks

Antonio Jimenez-Martinez and Óscar González-Guerra
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Óscar González-Guerra: Division of Economics, CIDE

No DTE 600, Working Papers from CIDE, División de Economía

Abstract: This paper proposes a framework of second-degree discrimination with two different versions of a service that are served in random networks with positive externalities. In the model, consumers must choose between purchasing a premium version of the service or a free version that comes with advertising about a certain good (unrelated to the service). The ads attached to the free version influence the free version adopters' opinions and, given the induced effects on the good sales, they affect the optimal pricing of the premium version. We relate the optimal pricing strategy to the underlying hazard rate and degree distribution of the random network. Under increasing hazard rates, hazard rate dominance always implies higher prices for the service. In some applications of the model, decreasing hazard rates are often associated to extreme situations where only the free version of the service is provided. The model provides foundations for empirical analysis since key features of social networks can be related to their underlying hazard rate functions and degree distributions.

Keywords: Social networks; second-degree discrimination; advertising; degree distributions; hazard rate (search for similar items in EconPapers)
JEL-codes: D83 D85 L1 M3 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2016-09
New Economics Papers: this item is included in nep-com, nep-mic, nep-mkt, nep-soc and nep-ure
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