Abstract

http://ssrn.com/abstract=1829080
 
 

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Analyzing Pricing Strategies for Online-Services with Network Effect


Min-Seok Pang


School of Management, George Mason University

Hila Etzion


University of Michigan, Stephen M. Ross School of Business

March 1, 2011

Ross School of Business Research Paper No. 1156

Abstract:     
In this study, we model firms that sell a product and a complementary online service, where only the latter displays positive network effects. That is, the value each consumer derives from the service increases with the total number of consumers that subscribe to the service. In addition, the service is valuable only to consumers who buy the product. We consider two pricing strategies: 1) bundle pricing, in which the firm charges a single price for the product and the service; and 2) separate pricing, in which the firm sets the prices of the product and the service separately, and consumers self-select whether to buy both or only the product. We show that, in contrast to the common result in the bundling literature, often the monopolist chooses not to offer the bundle (he either sells the service separately or not at all) while bundling would increase consumer surplus and social welfare. Thus, under-provision of the service can be the market outcome. We also demonstrate that network effects may cause the under-provision of the service

Number of Pages in PDF File: 54

Keywords: Bundling, Network Effects, Price Discrimination, Online Services, Online Game Industry

JEL Classification: C70, D21, D42, D60, D62, L86

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Date posted: May 3, 2011  

Suggested Citation

Pang, Min-Seok and Etzion, Hila, Analyzing Pricing Strategies for Online-Services with Network Effect (March 1, 2011). Ross School of Business Research Paper No. 1156. Available at SSRN: http://ssrn.com/abstract=1829080 or http://dx.doi.org/10.2139/ssrn.1829080

Contact Information

Min-Seok Pang (Contact Author)
School of Management, George Mason University ( email )
4400 University Drive
MS 5F4
Fairfax, VA 22030
United States
703-993-1874 (Phone)
HOME PAGE: http://sites.google.com/site/minspang
Hila Etzion
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
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