Pricing Network Effects

Itay Fainmesser () and Andrea Galeotti

The Review of Economic Studies, 2016, vol. 83, issue 1, 165-198

Abstract: The increase in the information that firms can collect or purchase about network effects across consumers motivates two important questions: how does a firm's pricing strategy react to detailed information on network effects? Are the availability and use of such information beneficial or detrimental to consumer surplus? We develop a model in which a monopoly sells a network good and price discriminates based on information about consumers' influence and consumers' susceptibility to influence. The monopoly optimally offers consumers price discounts for their influence and charges price premia for their susceptibility; the price premia and the price discounts are simple functions of the pattern of network effects. We determine under which conditions, relative to uniform price, consumer surplus increases, and we characterize the value of information on network effects for the monopoly.

Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:83:y:2016:i:1:p:165-198.

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The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

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