Pricing and Referrals in Diffusion on Networks
45 Pages Posted: 23 Apr 2014 Last revised: 26 Jun 2017
Date Written: June 1, 2017
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
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