IDEAS home Printed from https://ideas.repec.org/p/emc/wpaper/dte600.html
   My bibliography  Save this paper

Discrimination through "Versioning" with Advertising in Random Networks

Author

Listed:
  • Antonio Jiménez-Martínez

    () (Division of Economics, CIDE)

  • Óscar González-Guerra

    (Division of Economics, CIDE)

Abstract

This paper proposes a framework of second-degree discrimination with two different versions of a service that are served in random networks with positive externalities. In the model, consumers must choose between purchasing a premium version of the service or a free version that comes with advertising about a certain good (unrelated to the service). The ads attached to the free version influence the free version adopters’ opinions and, given the induced effects on the good sales, they affect the optimal pricing of the premium version. We relate the optimal pricing strategy to the underlying hazard rate and degree distribution of the random network. Under increasing hazard rates, hazard rate dominance always implies higher prices for the service. In some applications of the model, decreasing hazard rates are often associated to extreme situations where only the free version of the service is provided. The model provides foundations for empirical analysis since key features of social networks can be related to their underlying hazard rate functions and degree distributions.

Suggested Citation

  • Antonio Jiménez-Martínez & Óscar González-Guerra, 2016. "Discrimination through "Versioning" with Advertising in Random Networks," Working papers DTE 600, CIDE, División de Economía.
  • Handle: RePEc:emc:wpaper:dte600
    as

    Download full text from publisher

    File URL: http://cide.edu/repec/economia/pdf/DTE600.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Gary S. Becker & Kevin M. Murphy, 1993. "A Simple Theory of Advertising as a Good or Bad," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 941-964.
    2. Lewis, Tracy R. & Sappington, David E. M., 1991. "All-or-nothing information control," Economics Letters, Elsevier, vol. 37(2), pages 111-113, October.
    3. Lewis, Tracy R & Sappington, David E M, 1994. "Supplying Information to Facilitate Price Discrimination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 309-327, May.
    4. Arthur Campbell, 2013. "Word-of-Mouth Communication and Percolation in Social Networks," American Economic Review, American Economic Association, vol. 103(6), pages 2466-2498, October.
    5. Itay P. Fainmesser & Andrea Galeotti, 2016. "Pricing Network Effects," Review of Economic Studies, Oxford University Press, vol. 83(1), pages 165-198.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Social networks; second-degree discrimination; advertising; degree distributions; hazard rate;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:emc:wpaper:dte600. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Daniel Ventosa-Santaulària). General contact details of provider: http://edirc.repec.org/data/cideemx.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.