Seller's dilemma due to social interactions between customers

Abstract

In this paper, we consider a discrete choice model where heterogeneous agents are subject to mutual influences. We explore some consequences on the market's behaviour, in the simplest case of a uniform willingness to pay distribution. We exhibit a first-order phase transition in the profit optimization by the monopolist: if the social influence is strong enough, there is a regime where, if the mean willingness to pay increases, or if the production costs decrease, the optimal solution for the monopolist jumps from a solution with a high price and a small number of buyers, to a solution with a low price and a large number of buyers. Depending on the path of prices adjustments by the monopolist, simulations show hysteretic effects on the fraction of buyers.