Monopoly pricing and diffusion of social network goods

Abstract

I present a model of dynamic pricing and diffusion of a network good sold by a monopolist. In the model, the network good is a subscription social network good. This means that in each period, each consumer has to pay a subscription price to use the good, and the utility derived from subscribing to the good increases as more of her neighboring consumers subscribe. Consumers myopically optimize their subscription decisions, and the monopolist chooses a sequence of subscription prices that maximizes his discounted sum of per period profits. Three main results emerge. First, I characterize a unique steady state of the monopoly market. Second, I find that optimal sequences of subscription prices oscillate around the subscription price at the steady state. Third, I analyze how changes in the monopolist's discount factor and the density of the social network affect the subscription price, subscription rate, and deadweight loss at the steady state. (C) 2016 Elsevier Inc. All rights reserved.