Managing Adoption under Network Effects
31 Pages Posted: 20 May 2019 Last revised: 20 Nov 2019
Date Written: May 6, 2019
We consider the design of promotional pricing strategies to stimulate the adoption of a new product whose consumption features network effects. A key aspect we model is the public uncertainty in the perceived utility of the product across the market and hence the anticipated adoption level. We focus on strategies that naturally arise from two informational considerations: either the firm fully alleviates the perceptional uncertainty so that consumers make informed buying decisions, or induces the consumers to make their adoption decisions blindly, i.e., based only on the prior public belief. For an uninformed firm, this public signaling of information is orchestrated by: a) providing a vanishingly small discount for early adoption in the case where it is beneficial to have the customers make informed purchase decisions, and b) providing a steep discount for early adoption in the case where it is beneficial to have the customers make their purchase decisions blindly. In the first case, most of the adoption takes place in the later informed period, while in the latter, all adoption takes place in the early blind period. We show that in the system limit where the products become more niche, i.e., the variance of the perception of the product across the target population is small, then inducing informed adoption results in a higher profit than blind adoption. On the other hand, if this variance is high, which is the case for products with a mass appeal, then inducing blind adoption results in a higher profit than informed adoption. Numerical analysis suggests that restricting to these two intuitive strategies incurs negligible loss relative to the optimal promotional pricing strategy.
Keywords: Adoption, Network Effects, Social Learning
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