Pricing and Referrals in Diffusion on Networks

45 Pages Posted: 23 Apr 2014 Last revised: 26 Jun 2017

See all articles by Matt V. Leduc

Matt V. Leduc

Paris School of Economics (PSE) / Université Paris 1

Matthew O. Jackson

Stanford University - Department of Economics; Santa Fe Institute; Canadian Institute for Advanced Research (CIFAR)

Ramesh Johari

Stanford University

Date Written: June 1, 2017

Abstract

When a new product or technology is introduced, potential consumers can learn its quality by trying the product, at a risk, or by letting others try it and free-riding on the information that they generate. We propose a dynamic game to study the adoption of technologies of uncertain value, when gents are connected by a network and a monopolist seller chooses a policy to maximize profits. Consumers with low degree (few friends) have incentives to adopt early, while consumers with high degree have incentives to free ride. The seller can induce high-degree consumers to adopt early by offering referral incentives - rewards to early adopters whose friends buy in the second period. Referral incentives thus lead to a 'double-threshold strategy' by which low and high-degree agents adopt the product early while middle-degree agents wait. We show that referral incentives are optimal on certain networks while inter-temporal price discrimination (i.e., a first-period price discount) is optimal on others, and discuss welfare implications.

Keywords: Network Games, Technology Adoption, Social Learning, Word-of-Mouth, Network Diffusion, Dynamic Pricing, Referral Incentives

JEL Classification: D85, C72, L11, L12

Suggested Citation

Leduc, Matt V. and Jackson, Matthew O. and Johari, Ramesh, Pricing and Referrals in Diffusion on Networks (June 1, 2017). Games and Economic Behavior, Vol. 104, 2017. Available at SSRN: https://ssrn.com/abstract=2425490 or http://dx.doi.org/10.2139/ssrn.2425490

Matt V. Leduc (Contact Author)

Paris School of Economics (PSE) / Université Paris 1 ( email )

48 boulevard Jourdan
Paris, 75014
France

HOME PAGE: http://sites.google.com/site/mattvleduc/

Matthew O. Jackson

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
1-650-723-3544 (Phone)

HOME PAGE: http://www.stanford.edu/~jacksonm

Santa Fe Institute

1399 Hyde Park Road
Santa Fe, NM 87501
United States

Canadian Institute for Advanced Research (CIFAR) ( email )

180 Dundas Street West, Suite 1400
Toronto, Ontario
Canada

Ramesh Johari

Stanford University ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
679
Abstract Views
2,642
rank
36,728
PlumX Metrics