Consumer Coordination and Optimal Pricing under Network Externalities

Seiya Hirano

ISER Discussion Paper from Institute of Social and Economic Research, Osaka University

Abstract: In the adoption decisions of network goods, coordination problems lead to multiple equilibria. While consumers coordination significantly impacts the firm's pricing strategies, the precise relationship between coordination behavior and optimal pricing has received little attention. This paper analyzes optimal pricing strategies for network goods under different forms of consumer coordination in a two-period model with strategic consumers. We introduce two novel coordination criteria: risk dominance and threshold coordination. Risk dominance coordination accounts for the risk premium of no-adoption and threshold coordination accounts for consumer heterogeneity in the adoption of the good. We show that under the risk dominance criterion, the firm sets a lower price in period 1 when the risk of the coordination failure is high, but sets a higher price in period 1 when the risk is low. Under threshold coordination, the firm sets a lower price in period 1 when consumers hold pessimistic beliefs about the network size and sets a higher price in period 1 when beliefs are optimistic. Our findings highlight the critical implications of consumer coordination for firms' pricing strategies.

Date: 2024-11, Revised 2025-01
New Economics Papers: this item is included in nep-com, nep-gth, nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.iser.osaka-u.ac.jp/library/dp/2024/DP1267R.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:1267r

Access Statistics for this paper

More papers in ISER Discussion Paper from Institute of Social and Economic Research, Osaka University Contact information at EDIRC.
Bibliographic data for series maintained by Librarian ().