Dynamic pricing of network goods with boundedly rational consumers

Abstract

Significance A consumer’s demand for a network good depends on the demands of other consumers, and therefore choosing this demand optimally poses a cognitive challenge for most consumers. In our model of pricing a network good, consumers display “bounded rationality” (in Herbert Simon’s sense), and the vendor chooses a dynamic price path to maximize the present value of profit. The result is a price and quantity path that differs significantly from that predicted by standard economic theory and is closer to empirical observations.