Durable-Goods Monopolists, Network Effects and Penetration Pricing

Cyrus C.Y. Chu and Hung-Ken Chien ()
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Cyrus C.Y. Chu: Institute of Economics, Academia Sinica, Taipei, Taiwan, https://www.econ.sinica.edu.tw/
Hung-Ken Chien: Economics Department, University of Pennsylvania

No 05-A001, IEAS Working Paper : academic research from Institute of Economics, Academia Sinica, Taipei, Taiwan

Abstract: We study the pricing problem of a durable-goods monopolist. With network effects, consumption externalities among heterogeneous groups of consumers generate a discontinuous demand function. Consequently, the lessor has to offer a low price in order to reach the mass market, whereas the seller has the option to build a customer base by setting a lower initial price and raise the price later in the mass market, which explains the practice of introductory pricing. Contrary to the existing literature, we show that profits from selling network goods may be higher than from leasing. Further, the seller in fact over-invests in R&D and makes the product more durable than necessary.

Keywords: Penetration pricing; network externality (search for similar items in EconPapers)
JEL-codes: L1 L11 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2005-02
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