Optimal Nonlinear Pricing in Social Networks Under Asymmetric Network Information

Abstract

How should a firm make pricing decisions in social networks when the customers hold in private their local network information? In “Optimal Nonlinear Pricing in Social Networks Under Asymmetric Network Information,” Zhang and Chen develop a solution approach based on calculus of variations and positive neighbor affiliation to tackle this problem. They show that the optimal pricing compromises the capitalization of the susceptibility to neighbor consumption with the motivation of one’s own consumption, which gives rise to a menu of quantity premium or quantity discount. In the Erdös and Rényi graph (a special case of the social network model in this paper), they find that the pricing scheme does not screen network positions; consequently, the firm can offer a simple uniform price. The authors also find that, in the context of two-way connections, the firm-optimal consumption becomes linear in customer degree in the scale-free network.