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Nonlinear Pricing in Markets with Interdependent Demand

Author

Listed:
  • Shmuel S. Oren

    (Department of Engineering-Economic Systems, Stanford University, Stanford, California 94305)

  • Stephen A. Smith

    (Xerox Research Center, 3333 Coyote Hill Road, Palo Alto, California 94304)

  • Robert B. Wilson

    (Graduate School of Business, Stanford University, Stanford, California 94305)

Abstract

This paper provides a mathematical framework for modeling demand and determining optimal price schedules in markets which have demand externalities and can sustain nonlinear pricing. These fundamental economic concepts appear in the marketplace in the form of mutual buyers' benefits and quantity discounts. The theory addressing these aspects is relevant to a wide variety of goods and services. Examples include tariffs for electronic communications services, pricing of franchises, and royalty fees for copyrighted material and patents. This paper builds on several previous results from microeconomics and extends nonlinear pricing to markets with demand externalities. The implications of this price structure are compared to results obtained for flat rates and two part tariffs in a similar context. A case study is described in which the results were applied to planning the startup of a new electronic communications service.

Suggested Citation

  • 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.
    • Handle: RePEc:inm:ormksc:v:1:y:1982:i:3:p:287-313
    DOI: 10.1287/mksc.1.3.287
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    Citations

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    Cited by:

    1. Csorba, Gergely, 2008. "Screening contracts in the presence of positive network effects," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 213-226, January.
    2. Shi-Woei Lin & Silvia Merdikawati & Shan-Fei Wu & Ruey-Huei Yeh, 2023. "Optimization and analysis of three-part tariff pricing strategies," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 45(4), pages 1223-1262, December.
    3. Roy Radner & Ami Radunskaya & Arun Sundararajan, 2010. "Dynamic Pricing of Network Goods with Boundedly Rational Consumers," Working Papers 10-13, New York University, Leonard N. Stern School of Business, Department of Economics.
    4. Hahn, Jong-Hee, 2003. "Nonlinear pricing of telecommunications with call and network externalities," International Journal of Industrial Organization, Elsevier, vol. 21(7), pages 949-967, September.
    5. Meng, Dawen & Tian, Guoqiang, 2008. "Nonlinear Pricing with Network Externalities and Countervailing Incentives," MPRA Paper 41212, University Library of Munich, Germany, revised Aug 2008.
    6. Denis Becker & Alexei Gaivoronski, 2014. "Stochastic optimization on social networks with application to service pricing," Computational Management Science, Springer, vol. 11(4), pages 531-562, October.
    7. Kanishka Misra & Eric M. Schwartz & Jacob Abernethy, 2019. "Dynamic Online Pricing with Incomplete Information Using Multiarmed Bandit Experiments," Marketing Science, INFORMS, vol. 38(2), pages 226-252, March.
    8. Wei Zhang & Sriram Dasu & Reza Ahmadi, 2017. "Higher Prices for Larger Quantities? Nonmonotonic Price–Quantity Relations in B2B Markets," Management Science, INFORMS, vol. 63(7), pages 2108-2126, July.
    9. Krzysztof Chrostek & Katarzyna Kopczewska, 2013. "Spatial Prediction Models for Real Estate Market Analysis," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 35.
    10. José López-Sánchez & José Arroyo-Barrigüete & Domingo Ribeiro, 2008. "Development of a technological competition model in the presence of network effects from the modified law of Metcalfe," Service Business, Springer;Pan-Pacific Business Association, vol. 2(2), pages 83-98, June.
    11. Hung-Ken Chien & C. Y. Cyrus Chu, 2008. "Sale or Lease? Durable-Goods Monopoly with Network Effects," Marketing Science, INFORMS, vol. 27(6), pages 1012-1019, 11-12.
    12. Hemant K. Bhargava & Kitty Wang & Xingyue (Luna) Zhang, 2022. "Fending Off Critics of Platform Power with Differential Revenue Sharing: Doing Well by Doing Good?," Management Science, INFORMS, vol. 68(11), pages 8249-8260, November.
    13. Buqing Ma & Chenchen Di & Lu Hsiao, 2020. "Return Window Decision in A Distribution Channel," Production and Operations Management, Production and Operations Management Society, vol. 29(9), pages 2121-2137, September.
    14. Jensen, Sissel, 2008. "Two-part tariffs with quality degradation," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 473-489, March.
    15. Cyrus C.Y. Chu & Hung-Ken Chien, 2005. "Durable-Goods Monopolists, Network Effects and Penetration Pricing," IEAS Working Paper : academic research 05-A001, Institute of Economics, Academia Sinica, Taipei, Taiwan.
    16. Ramanathan Subramaniam & Esther Gal-Or, 2009. "—Quantity Discounts in Differentiated Consumer Product Markets," Marketing Science, INFORMS, vol. 28(1), pages 180-192, 01-02.
    17. Arun Sundararajan, 2003. "Network Effects, Nonlinear Pricing and Entry Deterrence," Industrial Organization 0307002, University Library of Munich, Germany.
    18. Adib Bagh & Hemant K. Bhargava, 2013. "How to Price Discriminate When Tariff Size Matters," Marketing Science, INFORMS, vol. 32(1), pages 111-126, August.

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