Price screening with network effects and entry deterrence
AbstractThis paper presents a model of price screening for goods with network effects, by a monopoly seller, and by an entry-deterring monopolist. These products are used in variable quantities by heterogeneous customers, the magnitude of network effects is influenced by gross consumption, rather than simply by user base, and the value derived from the network effects may be related to individual consumption and to customer type. Conditions under which fulfilled-expectations contracts exist and are unique are established. While network effects generally raise total prices in the optimal contracts, accompanying changes in consumption vary widely. Under the standard assumption of homogeneous network effects, there are no changes in consumption; in contrast, usage-dependent network effects increase the consumption of all types. Additionally, type-dependent network effects can cause downward distortions in consumption levels across a subset (and in special cases, all) types. The direction and extent of these distortions depend on the relative rates of variation in marginal intrinsic value and marginal network value with type. When network effects are homogeneous, the optimal entry-deterring contract is a flat fee that results in the efficient outcome. In contrast, when the network effects are usage-dependent, consumption increases only for a subset of lower types; however, when these network effects are strong enough, there are no changes in total surplus induced by the entry threat, but merely a transfer of surplus from the seller to its customers. The presence of network effects and of an entry threat also increase distributional efficiency by reducing the disparity in relative value captured by different customer types. Managerial, regulatory and policy implications of these results are discussed
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 576.
Date of creation: 11 Aug 2004
Date of revision:
Contact details of provider:
Phone: 1 212 998 3820
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
nonlinear pricing; network externalities; screening; adverse selection; contract theory;
Find related papers by JEL classification:
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.