Start Date
14-12-2012 12:00 AM
Description
We study revenue maximization for a monopolist selling a divisible good with positive externalities and how revenue is tied to network structure and the level of price discrimination. We consider a setting where the monopolist can offer individualized prices and derive an explicit characterization of the optimal price for each consumer as a function of his network position. We show that such a policy amounts to the solution to a quadratic program and that it is optimal for the monopolist to charge each agent a price that is proportional to a measure of social network importance called Bonacich centrality. We also study a constrained discriminatory pricing policy whereby the seller can choose no more than k distinct prices. We show that the general problem is NP-complete and consider a relaxation of the problem that is polynomial-time solvable. We provide bounds on the revenue difference between k-pricing and full price discrimination.
Recommended Citation
Corbo, Jacomo and Lin, Di, "Optimal Pricing with Positive Network Effects: The Big Benefits of Just a Little Discrimination" (2012). ICIS 2012 Proceedings. 20.
https://aisel.aisnet.org/icis2012/proceedings/DigitalNetworks/20
Optimal Pricing with Positive Network Effects: The Big Benefits of Just a Little Discrimination
We study revenue maximization for a monopolist selling a divisible good with positive externalities and how revenue is tied to network structure and the level of price discrimination. We consider a setting where the monopolist can offer individualized prices and derive an explicit characterization of the optimal price for each consumer as a function of his network position. We show that such a policy amounts to the solution to a quadratic program and that it is optimal for the monopolist to charge each agent a price that is proportional to a measure of social network importance called Bonacich centrality. We also study a constrained discriminatory pricing policy whereby the seller can choose no more than k distinct prices. We show that the general problem is NP-complete and consider a relaxation of the problem that is polynomial-time solvable. We provide bounds on the revenue difference between k-pricing and full price discrimination.