Dynamic Pricing of Network Goods with Boundedly Rational Consumers

46 Pages Posted: 9 Oct 2008

See all articles by Roy Radner

Roy Radner

Leonard N. Stern School of Business - Department of Economics

Ami Radunskaya

Claremont Colleges - Pomona College

Arun Sundararajan

New York University (NYU): Stern School of Business and Center for Data Science

Multiple version iconThere are 2 versions of this paper

Date Written: June 2010

Abstract

We present a model of dynamic monopoly pricing for a good that displaysnetwork effects. In contrast with the standard notion of arational-expectations equilibrium, we model consumers as boundedlyrational, and unable either to pay immediate attention to each pricechange, or to make accurate forecasts of the adoption of the networkgood. Our analysis shows that the seller's optimal price trajectory hasthe following structure: the price is low when the user base is below atarget level, is high when the user base is above the target, and is setto keep user base stationary once the target level has been attained. Weshow that this pricing policy is robust to a number of extensions, whichinclude the product's user base evolving over time, and consumers basingtheir choices on a mixture of a myopic and a "stubborn"expectation of adoption. Our results differ significantly from thosethat would be predicted by a model based on rational-expectationsequilibrium, and are more consistent with the pricing of network goodsobserved in practice.

Suggested Citation

Radner, Roy and Radunskaya, Ami and Sundararajan, Arun, Dynamic Pricing of Network Goods with Boundedly Rational Consumers (June 2010). New York University Stern School of Business; Pomona College, Claremont, CA, Vol. , pp. -, 2010. Available at SSRN: https://ssrn.com/abstract=1281332

Roy Radner (Contact Author)

Leonard N. Stern School of Business - Department of Economics ( email )

44 West Fourth Street, 7-180
New York, NY 10012
United States

Ami Radunskaya

Claremont Colleges - Pomona College

Claremont, CA 91711
United States

Arun Sundararajan

New York University (NYU): Stern School of Business and Center for Data Science ( email )

44 West 4th Street, KMC 8-90
New York, NY 10012
United States

HOME PAGE: http://digitalarun.ai/

Register to save articles to
your library

Register

Paper statistics

Downloads
101
Abstract Views
946
rank
90,047
PlumX Metrics