Unobserved Preferences and Dynamic Platform Pricing under Positive Network Externality
32 Pages Posted: 31 Mar 2020
Date Written: March 5, 2020
We study the dynamic optimization of platform pricing in industries with positive direct net-work externalities. The utility of the network for the consumer is modelled as a function of three components. Platform price and network size (participation rate) affect the consumer’s decision to join the platform. The platform operator is assumed to know the consumer’s sensitivities with respect to these components. In addition, consumer’s utility is a function of other attributes such as network privacy policies and environmental effects of the service. We assume that the distribution of these unobserved preferences in the potential customer base is known to the platform operator. We show analytically how the unobserved preferences affect the dynamic platform price design. Both static and rational expectations with respect to the platform participation are presented. We simulate an electricity market demand side management service application and show that the platform operator sets low prices in the launch phase. The platform operator can set higher launching prices if it can affect customers’ preferences, expectations or adjustment friction.
Keywords: Dynamic pricing, Network externality, Unobserved preferences, Electricity market, Demand side management
JEL Classification: L11, L14, D85, C61
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