Dynamic Pricing of Network Goods with Boundedly Rational Consumers

CeDER Working Paper No. 06-03

58 Pages Posted: 13 Mar 2006 Last revised: 7 Oct 2010

See all articles by Roy Radner

Roy Radner

Leonard N. Stern School of Business - Department of Economics

Arun Sundararajan

New York University (NYU): Stern School of Business and Center for Data Science

Ami Radunskaya

Claremont Colleges - Pomona College

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2006

Abstract

We present a model of dynamic monopoly pricing for a good that displays network effects. In contrast with the standard notion of a rational-expectations equilibrium, we model consumers as boundedly rational, and unable either to pay immediate attention to each price change, or to make accurate forecasts of the adoption of the network good. Our analysis shows that the seller's optimal price trajectory has the following simple structure: the price is zero when the product user base is below a specific threshold, and is chosen to keep user base stationary once this threshold demand level has been attained. We show that our prescribed pricing policy is robust to a number of extensions, which include the product's user base evolving over time, a fraction of consumers being sufficiently rational to make accurate adoption forecasts, and consumers basing their choices on a mixture of a myopic and a stubborn expectation of adoption. Our results differ significantly from those that would be predicted by a model based on rational-expectations equilibrium, and are more consistent with the pricing of network goods observed in practice.

Keywords: network externalities, network effects, bounded rationality, myopic, target policy

JEL Classification: D42, L12, C61

Suggested Citation

Radner, Roy and Sundararajan, Arun and Radunskaya, Ami, Dynamic Pricing of Network Goods with Boundedly Rational Consumers (February 1, 2006). CeDER Working Paper No. 06-03. Available at SSRN: https://ssrn.com/abstract=888550 or http://dx.doi.org/10.2139/ssrn.888550

Roy Radner

Leonard N. Stern School of Business - Department of Economics ( email )

44 West Fourth Street, 7-180
New York, NY 10012
United States

Arun Sundararajan (Contact Author)

New York University (NYU): Stern School of Business and Center for Data Science ( email )

44 West 4th Street, KMC 8-90
New York, NY 10012
United States

HOME PAGE: http://digitalarun.ai/

Ami Radunskaya

Claremont Colleges - Pomona College

Claremont, CA 91711
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
230
Abstract Views
1,756
rank
89,950
PlumX Metrics