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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/14129
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| Title: | Networks Effects, Nonlinear Pricing and Entry Deterrence |
| Authors: | Sundararajan, Arun |
| Issue Date: | Feb-2003 |
| Publisher: | Stern School of Business, New York University |
| Series/Report no.: | IS-03-01 |
| Abstract: | A number of technology products display positive network effects, and
are used in variable quantities by heterogeneous customers. Examples
include operating systems, infrastructure and back-end software, web
services and networking equipment. This paper studies optimal nonlinear
pricing for such products, under incomplete information, and with the
threat of competitive entry. Both homogeneous and heterogeneous network
effects are modeled. Conditions under which a fulfilled-expectations
contract exists and is unique are established. While network effects
generally raise price, it is shown that accompanying changes in
consumption depend on the nature of the network effects - in some cases,
it is optimal for the monopolist to induce no changes in usage across
customers, while in others cases, network effects raise the usage of all
market participants. Optimal pricing is shown to include quantity
discounts that increase with usage, and may also involve a nonlinear
two-part tariff. These results highlight the impact of network effects
on trade-offs between price discrimination and value creation, and have
important managerial implications for pricing policy in technology
markets. The need to deter competitive entry generally lowers profits
for the monopolist, and increases customer surplus. When network effects
are homogeneous across customers, the resulting entry-deterring monopoly
contract is a fixed fee and results in the socially optimal outcome.
However, when the magnitude of heterogeneous network effects is
relatively high, there are no changes in total surplus induced by the
entry threat, and the price changes merely cause a transfer of value
from the seller to its customers. The presence of network effects, and
of a credible entry threat, are also shown to increase distributional
efficiency by reducing the disparity in relative value captured by
different customer types. Regulatory and policy implications of these
results are discussed. |
| URI: | http://hdl.handle.net/2451/14129 |
| Appears in Collections: | IOMS: Information Systems Working Papers
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