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Pricing and Referrals in Diffusion on Networks

Matt V. Leduc, Matthew Jackson () and Ramesh Johari

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Abstract: When a new product or technology is introduced, potential consumers can learn its quality by trying the product, at a risk, or by letting others try it and free-riding on the information that they generate. We propose a dynamic game to study the adoption of technologies of uncertain value, when agents are connected by a network and a monopolist seller chooses a policy to maximize profits. Consumers with low degree (few friends) have incentives to adopt early, while consumers with high degree have incentives to free ride. The seller can induce high-degree consumers to adopt early by offering referral incentives - rewards to early adopters whose friends buy in the second period. Referral incentives thus lead to a `double-threshold strategy' by which low and high-degree agents adopt the product early while middle-degree agents wait. We show that referral incentives are optimal on certain networks while inter-temporal price discrimination (i.e., a first-period price discount) is optimal on others, and discuss welfare implications.

New Economics Papers: this item is included in nep-com, nep-mic, nep-net and nep-reg
Date: 2015-09, Revised 2017-06
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Published in Games and Economic Behavior 104 (2017) 568-594

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