Optimal Consumer Network Structure Formation under Network Effects: Seeds Controllability and Visibility
AbstractUnderstanding the process of software adoption is of paramount importance to software start-ups. We study a monopolistic seller’s optimal consumer network structure formation (seeding, segmentation, sequencing, and pricing strategies) under network effects. We demonstrate the importance of adoption sequencing as well as controllability over the seeding process to seller’s profit, consumer surplus, and social welfare. Under multi-pricing, full information, and full control over the seeding process, with both multiplicative and additive forms of network effects, we show that all segments contain only paying customers except the first one, which contains both seeded and paying customers; and segments are opened in order of the customer valuation. Further, the seller’s optimal strategy is socially optimal. Under single-pricing and limited seeding control, worst case seeding (where all seeds go to the high-valuation customers) leads to higher social welfare and consumer surplus than uniform seeding, as the former covers a larger portion of the market while charging a lower price. In the case of random seeding with limited control, we identify an optimal strategy and conditions under which the optimal price is not affected by the randomness of seeding.
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Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 11-07.
Length: 37 pages
Date of creation: Sep 2011
Date of revision: Oct 2011
Contact details of provider:
Web page: http://www.NETinst.org/
network effects; software; seeding; adoption sequencing; price discrimination;
Find related papers by JEL classification:
- D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
- M15 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - IT Management
- M31 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Marketing
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