A product has a social network dimension when its use involves interaction between people. We analyse monopoly pricing in a market where consumers are characterised by their social relations. Consumers get utility from interacting with other people with whom they have a social relation. The monopolist sells a device that enables efficient interaction. This paper introduces two novel features to social relations literature. One, we make players' payoffs endogenous by setting a monopoly pricing problem on top of a network coordination game. Two, we abandon the perfect information assumption by limiting players' capacity to observe prevailing information. Asymmetric information eliminates much of the complexity inherent in the perfect information variant: the role of consumer identity is eliminated, but the role of network structure is maintained. We analyse the roles of network topology and size on the monopoly price and surplus generated in the network. In markets where social relations are important, the implicit assumption on total connectedness of conventional network externalities models exaggerates the value of the network. The topological effect works against, and dominates the size effect. Therefore, the monopolist incorporates network topology in its price. Under asymmetric information, the monopoly prefers symmetric networks, but the social optimum is an asymmetric network. If the firm is allowed to price discriminate, its profits increase to the same level that it obtains in symmetric networks. Monopoly rents and consumer surplus decrease as consumer heterogeneity is increased. This does not necessarily happen under perfect information; it depends on the network topology.JEL Classification: D42, D82, L14.
This paper analyses the effects of network externalities in strategic R&D competition. We present a model of two firms competing with R&D investments and prices in a differentiated consumer market. Buyers form firm-specific networks which can be compatible. A high degree of compatibility and large spillovers moderate price competition due to weak strategic value of firm-specific networks and R&D investments respectively. Asymmetry in product qualities brings out network effects that cancel out in conventional symmetric settings. The lower quality firm increases R&D and decreases its price as spillovers or network compatibility is increased. This happens when R&D and firm-specific network size have high strategic value.JEL Classification: L13, L15, O32.
We analyse how consumer heterogeneity a¤ects buying behaviour and the monopoly pricing of a network good and its usage. Under perfect information, su¢ ciently high heterogeneity yields a unique equilibrium, and the unit price is increasing in heterogeneity. Under incomplete information, we have a global game. The unit price is independent of heterogeneity, and it tends to be higher than the perfect information price, because the monopoly biases its tari¤ structure to incorporate the uncertainty over usage revenues. Under incomplete information, pro…ts are decreasing in uncertainty. Consumer surplus increases in uncertainty, only if the level of uncertainty is high initially.
We study a bilateral negotiation setup where, at a bargaining impasse, the disadvantaged party chooses whether to escalate the conflict or not. Escalation is costly for both parties, and it results in a random draw of the winner of the escalated conflict. We derive the behavioral predictions of a simple social utility function, which is convex in disadvantageous inequality, thus connecting the inequity aversion and the prospect theory models. Our causal laboratory evidence is, to a large extent, consistent with the predicted effects. Among other things, the model predicts that the escalation rate is higher when escalation outcomes are riskier, and that the disagreement rate is lower when the cost of escalating the conflict is higher.
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