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Durable-Goods Monopolists, Network Effects and Penetration Pricing

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    We study the pricing problem of a durable-goods monopolist. With network effects, consumption externalities among heterogeneous groups of consumers generate a discontinuous demand function. Consequently, the lessor has to offer a low price in order to reach the mass market, whereas the seller has the option to build a customer base by setting a lower initial price and raise the price later in the mass market, which explains the practice of introductory pricing. Contrary to the existing literature, we show that profits from selling network goods may be higher than from leasing. Further, the seller in fact over-invests in R&D and makes the product more durable than necessary.

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    File URL: http://www.econ.sinica.edu.tw/upload/file/05-a001.pdf
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    Paper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 05-A001.

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    Length: 24 pages
    Date of creation: Feb 2005
    Date of revision:
    Handle: RePEc:sin:wpaper:05-a001
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    Web page: http://www.econ.sinica.edu.tw/index.php?foreLang=en
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    1. 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.
    2. Shmuel S. Oren & Stephen A. Smith, 1981. "Critical Mass and Tariff Structure in Electronic Communications Markets," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 467-487, Autumn.
    3. Luis Cabral & David Salant & Glenn Woroch, 1994. "Monopoly Pricing With Network Externalities," Industrial Organization 9411003, EconWPA.
    4. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
    5. Bulow, Jeremy, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 729-49, November.
    6. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
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