Optimal Consumer Network Structure Formation under Network Effects: Seeds Controllability and Visibility

Yifan Dou (), Marius Florin Niculescu () and Dongjun Wu ()
Additional contact information
Yifan Dou: Tsinghua University - School of Economics and Management
Marius Florin Niculescu: Georgia Institute of Technology - College of Management, http://mgt.gatech.edu/niculescu
Dongjun Wu: Georgia Institute of Technology - College of Management, http://mgt.gatech.edu/wu

No 11-07, Working Papers from NET Institute

Abstract: Understanding the process of software adoption is of paramount importance to software start-ups. We study a monopolistic seller’s optimal consumer network structure formation (seeding, segmentation, sequencing, and pricing strategies) under network effects. We demonstrate the importance of adoption sequencing as well as controllability over the seeding process to seller’s profit, consumer surplus, and social welfare. Under multi-pricing, full information, and full control over the seeding process, with both multiplicative and additive forms of network effects, we show that all segments contain only paying customers except the first one, which contains both seeded and paying customers; and segments are opened in order of the customer valuation. Further, the seller’s optimal strategy is socially optimal. Under single-pricing and limited seeding control, worst case seeding (where all seeds go to the high-valuation customers) leads to higher social welfare and consumer surplus than uniform seeding, as the former covers a larger portion of the market while charging a lower price. In the case of random seeding with limited control, we identify an optimal strategy and conditions under which the optimal price is not affected by the randomness of seeding.

Keywords: network effects; software; seeding; adoption sequencing; price discrimination (search for similar items in EconPapers)
JEL-codes: D85 L12 L86 M15 M31 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2011-09, Revised 2011-10
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.netinst.org/Dou_Niculescu_11_07.pdf (application/pdf)
no

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:net:wpaper:1107

Access Statistics for this paper

More papers in Working Papers from NET Institute
Bibliographic data for series maintained by Nicholas Economides ().