Social Network-Based Discriminatory Pricing Strategy

Abstract

In this paper we study such pricing practices like MCI's Friends and Family Program that employ price discriminations on the basis of callers' social ties. We characterize a consumer's personal communication network by the number of strong and weak ties that the consumer has. We then derive a consumer's demand for communication service from the structure of the consumer's personal communication network. A monopoly firm's social network-based discriminatory pricing strategy consists of a menu of price plans, each plan targeting at one type of social networks. Our paper provides useful guidelines for the design of optimal social network-based discriminatory pricing strategies. We show that a firm may offer price discounts to communications between “friends and family members” in order to extract a larger profit from communications between callers with weak ties.