Utility Tokens, Network Effects, and Pricing Power

Kirill Shakhnov () and Luana Zaccaria ()
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Kirill Shakhnov: University of Surrey School of Economics, Guildford GU2 7XH, United Kingdom
Luana Zaccaria: Einaudi Institute for Economics and Finance, 00168 Rome, Italy

Management Science, 2023, vol. 69, issue 11, 6625-6640

Abstract: We examine digital product markets in which consumers are heterogeneous in their propensity to actively interact with other users and valuations increase with the share of active users (e.g., social network platforms). We propose a model in which entrepreneurs can issue digital claims (tokens) to promise exclusive access to benefits that specifically enhance the utility of active users. This allows entrepreneurs to extract consumer surplus through price discrimination. Because there is an incentive to renege on the “exclusivity” promise ex post and expand the network of active users, the credibility of this commitment resides in a costly technology (blockchain) that embeds automatic contracts in the tokens sold and limits entrepreneurial discretion. We show that the profitability of token-based sales increases with entrepreneurial ability and the intensity of network effects.

Keywords: ICOs; blockchain; network effects; cryptocurrencies; fintech (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:11:p:6625-6640

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