Secrecy versus Transparency in Sales of Network Goods
39 Pages Posted: 11 Apr 2013 Last revised: 7 Feb 2018
Date Written: February 6, 2018
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
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