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Nonlinear Pricing in Markets with Interdependent Demand

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Author Info

  • Shmuel S. Oren

    (Department of Engineering-Economic Systems, Stanford University, Stanford, California 94305)

  • Stephen A. Smith

    (Xerox Research Center, 3333 Coyote Hill Road, Palo Alto, California 94304)

  • Robert B. Wilson

    (Graduate School of Business, Stanford University, Stanford, California 94305)

Abstract

This paper provides a mathematical framework for modeling demand and determining optimal price schedules in markets which have demand externalities and can sustain nonlinear pricing. These fundamental economic concepts appear in the marketplace in the form of mutual buyers' benefits and quantity discounts. The theory addressing these aspects is relevant to a wide variety of goods and services. Examples include tariffs for electronic communications services, pricing of franchises, and royalty fees for copyrighted material and patents. This paper builds on several previous results from microeconomics and extends nonlinear pricing to markets with demand externalities. The implications of this price structure are compared to results obtained for flat rates and two part tariffs in a similar context. A case study is described in which the results were applied to planning the startup of a new electronic communications service.

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File URL: http://dx.doi.org/10.1287/mksc.1.3.287
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Bibliographic Info

Article provided by INFORMS in its journal Marketing Science.

Volume (Year): 1 (1982)
Issue (Month): 3 ()
Pages: 287-313

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Handle: RePEc:inm:ormksc:v:1:y:1982:i:3:p:287-313

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Related research

Keywords: nonlinear pricing; demand externalities; telecommunication networks;

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Cited by:
  1. José López-Sánchez & José Arroyo-Barrigüete & Domingo Ribeiro, 2008. "Development of a technological competition model in the presence of network effects from the modified law of Metcalfe," Service Business, Springer, vol. 2(2), pages 83-98, June.
  2. Jensen, Sissel, 2008. "Two-part tariffs with quality degradation," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 473-489, March.
  3. Hahn, Jong-Hee, 2003. "Nonlinear pricing of telecommunications with call and network externalities," International Journal of Industrial Organization, Elsevier, vol. 21(7), pages 949-967, September.
  4. Meng, Dawen & Tian, Guoqiang, 2008. "Nonlinear Pricing with Network Externalities and Countervailing Incentives," MPRA Paper 41212, University Library of Munich, Germany, revised Aug 2008.
  5. Cyrus C.Y. Chu & Hung-Ken Chien, 2005. "Durable-Goods Monopolists, Network Effects and Penetration Pricing," IEAS Working Paper : academic research 05-A001, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  6. Arun Sundararajan, 2003. "Network Effects, Nonlinear Pricing and Entry Deterrence," Industrial Organization 0307002, EconWPA.

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