Pricing Network Effects

Fainmesser, I P and Galeotti, A (2016) Pricing Network Effects. Review of Economic Studies, 83 (1). pp. 165-198. ISSN 0034-6527

Abstract

The increase in the information that firms can collect or purchase about network effects across consumers motivates two important questions: how does a firm's pricing strategy react to detailed information on network effects? Are the availability and use of such information beneficial or detrimental to consumer surplus? We develop a model in which a monopoly sells a network good and price discriminates based on information about consumers' influence and consumers' susceptibility to influence. The monopoly optimally offers consumers price discounts for their influence and charges price premia for their susceptibility; the price premia and the price discounts are simple functions of the pattern of network effects. We determine under which conditions, relative to uniform price, consumer surplus increases, and we characterize the value of information on network effects for the monopoly.