Durable-Goods Monopolists, Network Effects and Penetration Pricing
AbstractWe study the pricing problem of a durable-goods monopolist. With network effects, consumption externalities among heterogeneous groups of consumers generate a discontinuous demand function. Consequently, the lessor has to offer a low price in order to reach the mass market, whereas the seller has the option to build a customer base by setting a lower initial price and raise the price later in the mass market, which explains the practice of introductory pricing. Contrary to the existing literature, we show that profits from selling network goods may be higher than from leasing. Further, the seller in fact over-invests in R&D and makes the product more durable than necessary.
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Bibliographic InfoPaper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 05-A001.
Length: 24 pages
Date of creation: Feb 2005
Date of revision:
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Web page: http://www.econ.sinica.edu.tw/index.php?foreLang=en
More information through EDIRC
Penetration pricing; network externality;
Find related papers by JEL classification:
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
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- Shmuel S. Oren & Stephen A. Smith & Robert B. Wilson, 1982. "Nonlinear Pricing in Markets with Interdependent Demand," Marketing Science, INFORMS, vol. 1(3), pages 287-313.
- Luis Cabral & David Salant & Glenn Woroch, 1994.
"Monopoly Pricing With Network Externalities,"
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- Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
- Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
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