Nonlinear pricing and type-dependent network effects
Arun Sundararajan
Economics Letters 83, pp.107-113
Last revised: August 2003
Abstract:
A model of monopoly pricing under incomplete information is analyzed for a product used in varying quantities by heterogeneous customers, and which displays positive network effects that are type-dependent. Compared with outcomes in the absence of network effects, there may be further downward (or upward) distortions in individual consumption levels as a consequence of the network effects. For instance, under certain conditions, the presence of network effects can reduce individual consumption for all but the highest type. The direction and extent of these distortions depends on the relative rates of change in marginal intrinsic value and marginal network value as customer type is varied. The presence of network effects always increases monopoly profits; their effect on consumer surplus is not always positive.
JEL Codes: D42, L12
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