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Price-Setting Behavior in the Presence of Social Interactions

Author

Listed:
  • Soetevent Adriaan R.

    () (Department of Economics, University of Amsterdam, Roetersstraat11, NL-1018 WB Amsterdam, Netherlands)

  • Schoonbeek Lambert

    () (Department of Economics, University of Groningen, P.O. Box 800, NL-9700 AV Groningen, Netherlands)

Abstract

We consider a market with a profit-maximizing monopolistic firm. Utility-maximizing consumers either buy one unit of the good or none at all. The demand for the good is influenced by local social interactions. That is, the utility which a consumer derives from the consumption of the good depends positively on the fraction of other consumers in his own social group that consume the good. We first consider a benchmark case where the population of consumers is not segmented and constitutes one social group. We derive the optimal price and profit of the firm for this case. Next, we analyse the optimal price and profit for the case where the population of consumers is partitioned into two different social groups. Comparing the results for the cases with one and two social groups, it turns out that the partition into groups does not unambiguously gives the firm the opportunity to raise its price and increase its profit. The effects depend on a non-trivial interplay between the strength of the social interaction effect and the specific composition of the social groups.

Suggested Citation

  • Soetevent Adriaan R. & Schoonbeek Lambert, 2006. "Price-Setting Behavior in the Presence of Social Interactions," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 226(2), pages 208-228, April.
    • Handle: RePEc:jns:jbstat:v:226:y:2006:i:1:p:208-228
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    References listed on IDEAS

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    More about this item

    Keywords

    Conformity; local externalities; social interactions; monopoly pricing;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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