Buying Decision Coordination and Monopoly Pricing of Network Goods

21 Pages Posted: 28 Apr 2016

Date Written: Summer 2016

Abstract

We analyze how uncertainty about consumers' preferences affects the pricing of a network device and the interaction usage it enables. A premium device price may give high hardware profits, but adoption will be low reducing the profits from interaction services. The firm internalizing this adjusts its hardware price downward, and prices as if it was getting the maximal interaction usage profits from the full network. Profits decrease in uncertainty, whereas consumer surplus increases in uncertainty, but only if the level of uncertainty is high. Bundling the device and services is profitable if uncertainty relates mostly to consumers' private information.

Suggested Citation

Sääskilahti, Pekka, Buying Decision Coordination and Monopoly Pricing of Network Goods (Summer 2016). Journal of Economics & Management Strategy, Vol. 25, Issue 2, pp. 313-333, 2016, Available at SSRN: https://ssrn.com/abstract=2771436 or http://dx.doi.org/10.1111/jems.12138

Pekka Sääskilahti (Contact Author)

Compass Lexecon ( email )

Helsinki
Finland

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