Secrecy versus Transparency in Sales of Network Goods

39 Pages Posted: 11 Apr 2013 Last revised: 7 Feb 2018

See all articles by Ming Hu

Ming Hu

University of Toronto - Rotman School of Management

Zizhuo Wang

University of Minnesota - Minneapolis - Industrial & System Engineering; The Chinese University of Hong Kong, Shenzhen

Yinbo Feng

University of Toronto - Operations Management

Date Written: February 6, 2018

Abstract

We study a two-period model in which a firm faces the problem of deciding whether to commit to sales volume disclosure under market size uncertainty, when selling a network good to strategic customers who time their purchases. If early sales is transparent, the second-period customers will base their purchase decisions on this information. If sales is kept a secret, all customers make purchase decisions based on their prior knowledge regarding the market size. We identify two countervailing effects of sales disclosure: (i) a pro-transparency Matthew effect: that is, the firm has an intrinsic tendency, driven by positive network externalities, to expose itself to market size uncertainty, because the benefit of a realized large market size tends to outweigh the loss of a realized small market size; and (ii) a pro-secrecy saturation effect: that is, for a sufficiently large expectation of network benefits, customers would make a purchase anyway even without knowing the realized sales, but may be turned away if observing a small sales volume. With exogenous prices, we show that transparency is dominating (resp., dominated) when the expected network benefit is relatively weak (resp., strong). We also examine three endogenous pricing scenarios. First, under state-independent pricing, transparency is dominating if the customer valuation distribution has a heavy tail. Second, if a firm can credibly preannounce a contingent pricing policy, transparency is always optimal. Finally, under contingent pricing without commitment, we show that transparency is optimal when customers are sufficiently patient.

Keywords: pricing, network goods, network externality, demand uncertainty, social learning, network effect

Suggested Citation

Hu, Ming and Wang, Zizhuo and Feng, Yinbo, Secrecy versus Transparency in Sales of Network Goods (February 6, 2018). Rotman School of Management Working Paper No. 2248311. Available at SSRN: https://ssrn.com/abstract=2248311 or http://dx.doi.org/10.2139/ssrn.2248311

Ming Hu (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada
416-946-5207 (Phone)

HOME PAGE: http://ming.hu

Zizhuo Wang

University of Minnesota - Minneapolis - Industrial & System Engineering ( email )

111 Church Street S.E.
Minneapolis, MN 55455
United States

The Chinese University of Hong Kong, Shenzhen ( email )

Yinbo Feng

University of Toronto - Operations Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada

Register to save articles to
your library

Register

Paper statistics

Downloads
686
Abstract Views
3,181
rank
36,512
PlumX Metrics