Optimal Pricing and Sequential Consumption

ZHOU, Junjie | CHEN, Ying-Ju

Social interactions play a crucial role in the markets of social goods. This paper examines the optimal selling scheme when products show such social good feature.

This paper examines a monopoly firm model adopting sequential launch strategy to sell social goods to a customer group in a network. Under this strategy, not only can the firm determine prices charged to customers but also the sequence by which products are sold to them, such that potential customers for the same product are served at different times, and firms strategically determine the sequence of customers they serve to maximize their business profitability. The consumption decision of one customer could directly affect the satisfaction regarding the same product of the other customers. It is shown that, with symmetric social interactions, the optimal pricing under an arbitrary launch sequence is independent of customer’s network positions, the launch sequence, or any underlying social interaction relations among customers, which is a generalization of the previous network-independent prices in the simultaneous-launch case. For any given sequence, where the launch sequence becomes more sequential or where the customer network becomes more connected, customers tend to opt for higher consumptions as a whole and, hence, higher profit is obtained by the firm. As a result, the optimal sequence to generate higher profit is a chain structure.

In addition, this paper establishes a pecking order by which the firm shall approach customers following the sequence of descending valuation-cost margins is established, and with homogeneous margins, any chain attains the optimal revenue.

The optimal price and the optimal launch sequence under asymmetric social interactions – where one player’s influence on a friend’s consumption is higher or lower than the friend’s influence on the player’s own – is also examined. It is shown that such an asymmetric model does not affect the optimality of the chain structure. However, unlike that under the basic symmetric social interactions, the optimal price with asymmetric social interactions actually depends on the asymmetric network structure, the launch sequence, and the strength of network effect. Unlike that under the aforesaid model where the firm has the power to perfectly price discriminate customers based on their positions on the social network, this paper also studies a uniform pricing scenario. It is shown that the firm’s optimal profit improves under sequence refinement, and this does not depend on the firm’s ability to price discriminate customers. Therefore, the sequence independence of the optimal pricing does not hold when either the social interaction is asymmetric or the firm is confined to use uniform pricing. Yet, such profit optimality of the chain structure applies to both variants of the basic model.

CHEN, Ying-Ju

Information Systems, Business Statistics & Operations Management