Impact of Network Structure on New Service Pricing

49 Pages Posted: 31 Aug 2018

See all articles by Saed Alizamir

Saed Alizamir

Yale School of Management

Ningyuan Chen

University of Toronto at Mississauga - Department of Management; University of Toronto - Rotman School of Management

Sang-Hyun Kim

Yale School of Management

Vahideh Manshadi

Yale School of Management

Date Written: August 21, 2018

Abstract

We analyze a firm's optimal pricing of a new service when consumers interact in a network and impose positive externality on one another. The firm initially provides its service for free, leveraging network externality to promote rapid service consumption growth. The firm raises the price and starts earning revenue only when a sufficient level of consumer interactions is established. Incorporating the local network effects in a non-stationary dynamic model, we study the impact of network structure on the firm's revenue and optimal pricing decision. We find that the firm delays the timing of service monetization when it faces a more strongly connected network, despite the fact that such a network allows the firm to monetize the service sooner by resulting in faster consumption growth. We also find that the firm benefits from network imbalance, i.e., the firm prefers a network of consumers with varying degrees of connections to that with similar degrees of connections. We also study the value of knowing the network structure and discuss how such knowledge impacts the firm's profitability.

Keywords: Local Network Effects, Network Externality, Service Pricing

Suggested Citation

Alizamir, Saed and Chen, Ningyuan and Kim, Sang-Hyun and Manshadi, Vahideh, Impact of Network Structure on New Service Pricing (August 21, 2018). Available at SSRN: https://ssrn.com/abstract=3236225 or http://dx.doi.org/10.2139/ssrn.3236225

Saed Alizamir

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Ningyuan Chen

University of Toronto at Mississauga - Department of Management ( email )


Canada

University of Toronto - Rotman School of Management ( email )

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

Sang-Hyun Kim

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Vahideh Manshadi (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
85
Abstract Views
511
rank
292,595
PlumX Metrics