Optimal Dynamic Pricing For Expanding Networks

Abstract

This paper analyzes the dynamic pricing decision of a monopolist marketing a new product or service whose consumption value increases with the expansion of the “network” of adopters. We characterize an optimal pricing strategy which maximizes the present value of the monopolist's profits, subject to the dynamics of the demand for network access. These dynamics depend, among other factors, on the current price and consumer anticipations about future network growth. We examine the effects of changes in the growth anticipations and the discount rate on the optimal equilibrium access price and network size. It is shown that higher growth anticipations and a lower discount rate result in a lower equilibrium price and a larger network.

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