Product line and service pricing considering negative network effects

Abstract

The network effects of products and services have an important impact on the design optimization of product lines and services. Value-added services that consider the network effect can significantly affect customers' consumption decisions. Meanwhile, they can infiltrate the main products and promote the profits of enterprises. As an effective sales strategy, bundling has become a new approach for enterprises to provide products and services. We investigate the optimal pricing and market share, as well as the maximum profits of products and services under pure and mixed bundling strategies, respectively, in the case of negative network effects for both products and services. Based on the multinomial logit model, we theoretically analyze the optimal solution and profit difference under pure and mixed bundling strategies. The results show that, considering the negative network effect, the profit functions of the pure and mixed bundling strategies are concave functions vis-à-vis the market share, and closed solutions of optimal pricing and market share, as well as maximum profits are obtained. Finally, the numerical simulation shows the profit difference between pure and mixed bundling strategies when the network effect changes. The research results can provide a theoretical basis and decision-making support for products and services pricing strategies.