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Price-Setting Behavior in the Presence of Social Interactions

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  • Adriaan R. Soetevent

    ()
    (Universitaet Amsterdam)

  • Lambert Schoonbeek

    ()
    (Universitaet Groningen)

Abstract

We consider a market with a profit-maximizing monopolistic firm. Utility-maximizing consumers either buy one unit of the good or none at all. The demand for the good is influenced by local social interactions. That is, the utility which a consumer derives from the consumption of the good depends positively on the fraction of other consumers in his own social group that consume the good. We first consider a benchmark case where the population of consumers is not segmented and constitutes one social group. We derive the optimal price and profit of the firm for this case. Next, we analyse the optimal price and profit for the case where the population of consumers is partitioned into two different social groups. Comparing the results for the cases with one and two social groups, it turns out that the partition into groups does not unambiguously gives the firm the opportunity to raise its price and increase its profit. The effects depend on a non-trivial interplay between the strength of the social interaction effect and the specific composition of the social groups.

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Bibliographic Info

Article provided by Justus-Liebig University Giessen, Department of Statistics and Economics in its journal Journal of Economics and Statistics.

Volume (Year): 226 (2006)
Issue (Month): 2 (March)
Pages: 208-228

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Handle: RePEc:jns:jbstat:v:226:y:2006:i:1:p:208-228

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Keywords: Conformity; local externalities; social interactions; monopoly pricing;

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  1. GRILO, Isabel & SHY, Oz & THISSE, Jacques-François, . "Price competition when consumer behavior is characterized by conformity or vanity," CORE Discussion Papers RP -1518, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Evans, William N & Oates, Wallace E & Schwab, Robert M, 1992. "Measuring Peer Group Effects: A Study of Teenage Behavior," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 966-91, October.
  3. George A. Akerlof, 1997. "Social Distance and Social Decisions," Econometrica, Econometric Society, vol. 65(5), pages 1005-1028, September.
  4. Cabral, Luis M. B. & Salant, David J. & Woroch, Glenn A., 1999. "Monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 199-214, February.
  5. Baake, Pio & Boom, Anette, 2001. "Vertical product differentiation, network externalities, and compatibility decisions," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 267-284, January.
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