Monopoly Pricing and Diffusion of (Social) Network Goods

Abstract

I present a new model of optimal dynamic pricing and diffusion of a network good sold by a monopolist. The good in this model is a social network good in that each consumer’s value of the good within a social network increases as more of her neighbors use the good. In each period, the monopolist sets a subscription price and consumers myopically optimize their choices after comparing the overall adoption and the current subscription price. Thus, in contrast with one-sided diffusion models in the social network literature, the diffusion process arises as an equilibrium behavior of both the monopolist and consumers. As a result, I characterize a unique equilibrium, in which the diffusion process stays at a certain point. The equilibrium is efficient in that it involves the highest adoption rate with respect to the equilibrium subscription price. I also present the deadweight loss in the equilibrium and show how it depends on the connectivity of the underlying social network.