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Optimal Dynamic Pricing For Expanding Networks

Author

Listed:
  • Anirudh Dhebar

    (Harvard University)

  • Shmuel S. Oren

    (Harvard University, University of California, Berkeley)

Abstract

This paper analyzes the dynamic pricing decision of a monopolist marketing a new product or service whose consumption value increases with the expansion of the “network” of adopters. We characterize an optimal pricing strategy which maximizes the present value of the monopolist's profits, subject to the dynamics of the demand for network access. These dynamics depend, among other factors, on the current price and consumer anticipations about future network growth. We examine the effects of changes in the growth anticipations and the discount rate on the optimal equilibrium access price and network size. It is shown that higher growth anticipations and a lower discount rate result in a lower equilibrium price and a larger network.

Suggested Citation

  • Anirudh Dhebar & Shmuel S. Oren, 1985. "Optimal Dynamic Pricing For Expanding Networks," Marketing Science, INFORMS, vol. 4(4), pages 336-351.
  • Handle: RePEc:inm:ormksc:v:4:y:1985:i:4:p:336-351
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    File URL: http://dx.doi.org/10.1287/mksc.4.4.336
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    References listed on IDEAS

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    Cited by:

    1. Amir, Rabah & Lazzati, Natalia, 2011. "Network effects, market structure and industry performance," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2389-2419.
    2. Hashimoto, Kaito & Matsubayashi, Nobuo, 2014. "A note on dynamic monopoly pricing under consumption externalities," Economics Letters, Elsevier, vol. 124(1), pages 1-8.
    3. Haruvy, Ernan & Prasad, Ashutosh, 2005. "Freeware as a competitive deterrent," Information Economics and Policy, Elsevier, vol. 17(4), pages 513-534, October.
    4. Nair, Anand & Closs, David J., 2006. "An examination of the impact of coordinating supply chain policies and price markdowns on short lifecycle product retail performance," International Journal of Production Economics, Elsevier, vol. 102(2), pages 379-392, August.
    5. Hao Zhao, 2003. "R&D Competition Between an Incumbent and an Entrant: An Integrated Model of R&D Investment, Performance Improvement, and Time-to-Market," Review of Marketing Science Working Papers 2-2-1023, Berkeley Electronic Press.
    6. 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.
    7. Roland T. Rust & Tuck Siong Chung, 2006. "Marketing Models of Service and Relationships," Marketing Science, INFORMS, vol. 25(6), pages 560-580, 11-12.
    8. Amiya Basu & Tridib Mazumdar & S. P. Raj, 2003. "Indirect Network Externality Effects on Product Attributes," Marketing Science, INFORMS, vol. 22(2), pages 209-221, April.
    9. Alexei Parakhonyak & Nick Vikander, 2013. "Optimal Sales Schemes for Network Goods," Discussion Papers 13-11, University of Copenhagen. Department of Economics.
    10. Mesak, Hani I. & Bari, Abdullahel & Babin, Barry J. & Birou, Laura M. & Jurkus, Anthony, 2011. "Optimum advertising policy over time for subscriber service innovations in the presence of service cost learning and customers' disadoption," European Journal of Operational Research, Elsevier, vol. 211(3), pages 642-649, June.
    11. Baohong Sun & Jinhong Xie & H. Henry Cao, 2004. "Product Strategy for Innovators in Markets with Network Effects," Marketing Science, INFORMS, vol. 23(2), pages 243-254, October.
    12. 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.
    13. Gabszewicz, Jean J. & Garcia, Filomena, 2008. "A note on expanding networks and monopoly pricing," Economics Letters, Elsevier, vol. 98(1), pages 9-15, January.
    14. Prasad Ashutosh & Bronnenberg Bart & Mahajan Vijay, 2004. "Product Entry Timing in Dual Distribution Channels: The Case of the Movie Industry," Review of Marketing Science, De Gruyter, vol. 2(1), pages 1-20, March.
    15. Laura Rinaldi, 2008. "Estimation of network externalities and critical mass in the mobile telephone market: a panel data analysis of the OECD countries," Working Papers 1_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
    16. Fruchter, Gila E. & Sigué, Simon P., 2013. "Dynamic pricing for subscription services," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2180-2194.
    17. Shin, Euncheol, 2017. "Monopoly pricing and diffusion of social network goods," Games and Economic Behavior, Elsevier, vol. 102(C), pages 162-178.
    18. Wedad Elmaghraby & P{i}nar Keskinocak, 2003. "Dynamic Pricing in the Presence of Inventory Considerations: Research Overview, Current Practices, and Future Directions," Management Science, INFORMS, vol. 49(10), pages 1287-1309, October.
    19. Baraldi, A. Laura, 2008. "Network Externalities and Critical Mass in the Mobile Telephone Network: a Panel Data Estimation," MPRA Paper 13373, University Library of Munich, Germany.
    20. Laurens G. Debo & L. Beril Toktay & Luk N. Van Wassenhove, 2005. "Market Segmentation and Product Technology Selection for Remanufacturable Products," Management Science, INFORMS, vol. 51(8), pages 1193-1205, August.

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