Second-Degree Price Discrimination in the Presence of Positive Network Effects

Abstract

This paper uses tools provided by lattice theory to describe the second-degree price discrimination problem faced by a monopolist seller of a network good, and to give a complete characterization of the optimal contracts it can use. We build a general model in a discrete and a continuous type framework to demonstrate that positive network effects and asymmetric information together will lead to a downward distortion for all consumers in the quantities provided. Despite the overall downward distortion result, positive network effects lead to higher consumption levels than in the standard models without network effects.

Keywords: network effects, price discrimination, contracting with externalities, nonlinear pricing, supermodularity

JEL Classification: D42, D62, D82, L12