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Optimal Consumer Network Structure Formation Under Network Effects: Seeds Controllability and Visibility

38 Pages Posted: 24 Nov 2011  

Yifan Dou

Fudan University - School of Management

Marius Florin Niculescu

Georgia Institute of Technology - Scheller College of Business

D. J. Wu

Georgia Institute of Technology - Ernest Scheller Jr. College of Business

Date Written: October 2011

Abstract

Understanding the process of software adoption is of paramount importance to software start-ups. We study a monopolistic seller’s optimal consumer network structure formation (seeding, segmentation, sequencing, and pricing strategies) under network effects. We demonstrate the importance of adoption sequencing as well as controllability over the seeding process to seller’s profit, consumer surplus, and social welfare. Under multi-pricing, full information, and full control over the seeding process, with both multiplicative and additive forms of network effects, we show that all segments contain only paying customers except the first one, which contains both seeded and paying customers; and segments are opened in order of the customer valuation. Further, the seller’s optimal strategy is socially optimal. Under single-pricing and limited seeding control, worst case seeding (where all seeds go to the high-valuation customers) leads to higher social welfare and consumer surplus than uniform seeding, as the former covers a larger portion of the market while charging a lower price. In the case of random seeding with limited control, we identify an optimal strategy and conditions under which the optimal price is not affected by the randomness of seeding.

Keywords: network effects, software, seeding, adoption sequencing, price discrimination

JEL Classification: D85, L12, L86, M15, M31

Suggested Citation

Dou, Yifan and Niculescu, Marius Florin and Wu, D. J., Optimal Consumer Network Structure Formation Under Network Effects: Seeds Controllability and Visibility (October 2011). NET Institute Working Paper No. 11-07. Available at SSRN: https://ssrn.com/abstract=1952748 or http://dx.doi.org/10.2139/ssrn.1952748

Yifan Dou (Contact Author)

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Marius Florin Niculescu

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-385-3105 (Phone)

HOME PAGE: http://scheller.gatech.edu/directory/faculty/niculescu/index.html

D. J. Wu

Georgia Institute of Technology - Ernest Scheller Jr. College of Business ( email )

800 West Peachtree Street, NW
Atlanta, GA 30308
United States
404-894-4364 (Phone)
404-894-6030 (Fax)

HOME PAGE: http://mgt.gatech.edu/wu

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