Pricing and Diffusion of Durables with Network Externalities

Keisuke Hattori and Yusuke Zennyo

MPRA Paper from University Library of Munich, Germany

Abstract: This paper considers the optimal pricing and diffusion of a durable good that exhibits positive network externalities, when consumers are heterogeneous with respect to their expectations about future network sizes. We consider the existence of naive consumers, as well as of sophisticated consumers who have fulfilled expectations about future network sizes. At the time of purchase, naive consumers presume that the current network size will continue over future periods. We find that the firm charges the sequential-diffusion pricing that makes sophisticated consumers function as early adopters, unless consumers quickly become bored with using the goods and/or unless the firm heavily discounts its future profits. In addition, we show that naive consumers may enjoy a greater surplus than do sophisticated consumers, implying that the firm benefits when more consumers are sophisticated. We also compare the profitability of three possible pricing strategies with different commitment powers: fixed, responsive, and pre-announced pricing.

Keywords: durable good; network externalities; diffusion process; consumer naivete (search for similar items in EconPapers)
JEL-codes: D21 D42 L12 L14 (search for similar items in EconPapers)
Date: 2018-04-15
New Economics Papers: this item is included in nep-com, nep-mic, nep-mkt and nep-net
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:86203

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