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Optimal Dynamic Pricing For Expanding Networks

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  • Anirudh Dhebar

    (Harvard University)

  • Shmuel S. Oren

    (Harvard University, University of California, Berkeley)

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    Abstract

    This paper analyzes the dynamic pricing decision of a monopolist marketing a new product or service whose consumption value increases with the expansion of the “network” of adopters. We characterize an optimal pricing strategy which maximizes the present value of the monopolist's profits, subject to the dynamics of the demand for network access. These dynamics depend, among other factors, on the current price and consumer anticipations about future network growth. We examine the effects of changes in the growth anticipations and the discount rate on the optimal equilibrium access price and network size. It is shown that higher growth anticipations and a lower discount rate result in a lower equilibrium price and a larger network.

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    File URL: http://dx.doi.org/10.1287/mksc.4.4.336
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 4 (1985)
    Issue (Month): 4 ()
    Pages: 336-351

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    Handle: RePEc:inm:ormksc:v:4:y:1985:i:4:p:336-351

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    Cited by:
    1. Mesak, Hani I. & Bari, Abdullahel & Babin, Barry J. & Birou, Laura M. & Jurkus, Anthony, 2011. "Optimum advertising policy over time for subscriber service innovations in the presence of service cost learning and customers' disadoption," European Journal of Operational Research, Elsevier, vol. 211(3), pages 642-649, June.
    2. GABSZEWICZ, Jean J. & GARCIA, Filomena, 2005. "A note on expanding networks and monopoly pricing," CORE Discussion Papers 2005095, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Amir, Rabah & Lazzati, Natalia, 2011. "Network effects, market structure and industry performance," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2389-2419.
    4. Haruvy, Ernan & Prasad, Ashutosh, 2005. "Freeware as a competitive deterrent," Information Economics and Policy, Elsevier, vol. 17(4), pages 513-534, October.
    5. Nair, Anand & Closs, David J., 2006. "An examination of the impact of coordinating supply chain policies and price markdowns on short lifecycle product retail performance," International Journal of Production Economics, Elsevier, vol. 102(2), pages 379-392, August.
    6. Alexei Parakhonyak & Nick Vikander, 2013. "Optimal sales schemes for network goods," HSE Working papers WP BRP 41/EC/2013, National Research University Higher School of Economics.
    7. Hao Zhao, 2003. "R&D Competition Between an Incumbent and an Entrant: An Integrated Model of R&D Investment, Performance Improvement, and Time-to-Market," Review of Marketing Science Working Papers 2-2-1023, Berkeley Electronic Press.
    8. Laura Rinaldi, 2008. "Estimation of network externalities and critical mass in the mobile telephone market: a panel data analysis of the OECD countries," Working Papers 1_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
    9. Baraldi, A. Laura, 2008. "Network Externalities and Critical Mass in the Mobile Telephone Network: a Panel Data Estimation," MPRA Paper 13373, University Library of Munich, Germany.
    10. Fruchter, Gila E. & Sigué, Simon P., 2013. "Dynamic pricing for subscription services," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2180-2194.

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