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Optimal sales schemes for network goods

  • Alexei Parakhonyak

    ()

    (National Research University Higher School of Economics, Moscow, Russia.)

  • Nick Vikander

    ()

    (University of Copenhagen, Department of Economics.)

This paper examines the optimal sequencing of sales in the presence of network externalities. A firm sells a good to a group of consumers whose payoff from buying is increasing in total quantity sold. The firm selects the order to serve consumers so as to maximize expected sales. It can serve all consumers simultaneously, serve them all sequentially, or employ any intermediate scheme. We show that the optimal sales scheme is purely sequential, where each consumer observes all previous sales before choosing whether to buy himself. A sequential scheme maximizes the amount of information available to consumers, allowing success to breed success. Failure can also breed failure, but this is made less likely by consumers’ desire to influence one another’s behavior. We show that when consumers differ in the weight they place on the network externality, the firm would like to serve consumers with lower weights first. Our results suggests that a firm launching a new product should first target independent-minded consumers who can serve as opinion leaders for those who follow.

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Paper provided by National Research University Higher School of Economics in its series HSE Working papers with number WP BRP 41/EC/2013.

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Length: 27 pages
Date of creation: 2013
Date of revision:
Publication status: Published in WP BRP Series: Economics / EC, December 2013, pages 1-27
Handle: RePEc:hig:wpaper:41/ec/2013
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  1. Ochs, Jack & Park, In-Uck, 2004. "Overcoming the Coordination Problem: Dynamic Formation of Networks," CEI Working Paper Series 2004-18, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  2. Anirudh Dhebar & Shmuel S. Oren, 1985. "Optimal Dynamic Pricing For Expanding Networks," Marketing Science, INFORMS, vol. 4(4), pages 336-351.
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  7. David Gill & Daniel Sgroi, 2005. "Sequential Decisions with Tests," Economics Series Working Papers 242, University of Oxford, Department of Economics.
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  9. Gale, Douglas, 1998. "Monotone Games with Positive Spillovers," Working Papers 98-34, C.V. Starr Center for Applied Economics, New York University.
  10. David Gill & Daniel Sgroi, 2011. "The Optimal Choice of Pre-Launch Reviewer," Economics Series Working Papers 562, University of Oxford, Department of Economics.
  11. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  12. Joseph Farrell & Garth Saloner, 1984. "Standardization, Compatibility and Innovation," Working papers 345, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Jinhong Xie & Marvin Sirbu, 1995. "Price Competition and Compatibility in the Presence of Positive Demand Externalities," Management Science, INFORMS, vol. 41(5), pages 909-926, May.
  14. Cabral, Luis M. B. & Salant, David J. & Woroch, Glenn A., 1999. "Monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 199-214, February.
  15. Marco Ottaviani & Andrea Prat, 2001. "The Value of Public Information in Monopoly," Econometrica, Econometric Society, vol. 69(6), pages 1673-1683, November.
  16. Shlomo Kalish, 1985. "A New Product Adoption Model with Price, Advertising, and Uncertainty," Management Science, INFORMS, vol. 31(12), pages 1569-1585, December.
  17. Sgroi, D., 2000. "Optimizing Information in the Herd: Guinea Pigs, Profit and Welfare," Economics Papers 2000-w14, Economics Group, Nuffield College, University of Oxford.
  18. Subir Bose & Gerhard Orosel & Marco Ottaviani & Lise Vesterlund, 2008. "Monopoly pricing in the binary herding model," Economic Theory, Springer, vol. 37(2), pages 203-241, November.
  19. repec:rje:randje:v:37:y:2006:i:4:p:910-928 is not listed on IDEAS
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