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Optimal sales schemes for network goods

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  • Alexei Parakhonyak

    ()
    (National Research University Higher School of Economics, Moscow, Russia.)

  • Nick Vikander

    ()
    (University of Copenhagen, Department of Economics.)

Abstract

This paper examines the optimal sequencing of sales in the presence of network externalities. A firm sells a good to a group of consumers whose payoff from buying is increasing in total quantity sold. The firm selects the order to serve consumers so as to maximize expected sales. It can serve all consumers simultaneously, serve them all sequentially, or employ any intermediate scheme. We show that the optimal sales scheme is purely sequential, where each consumer observes all previous sales before choosing whether to buy himself. A sequential scheme maximizes the amount of information available to consumers, allowing success to breed success. Failure can also breed failure, but this is made less likely by consumers’ desire to influence one another’s behavior. We show that when consumers differ in the weight they place on the network externality, the firm would like to serve consumers with lower weights first. Our results suggests that a firm launching a new product should first target independent-minded consumers who can serve as opinion leaders for those who follow.

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Bibliographic Info

Paper provided by National Research University Higher School of Economics in its series HSE Working papers with number WP BRP 41/EC/2013.

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Length: 27 pages
Date of creation: 2013
Date of revision:
Publication status: Published in WP BRP Series: Economics / EC, December 2013, pages 1-27
Handle: RePEc:hig:wpaper:41/ec/2013

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Keywords: Product launch; Network externality; Sequencing of sales;

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  17. Sgroi, D., 2000. "Optimizing Information in the Herd: Guinea Pigs, Profit and Welfare," Economics Papers 2000-w14, Economics Group, Nuffield College, University of Oxford.
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