Nonlinear Pricing with Network Externalities and Countervailing Incentives

Meng, Dawen and Tian, Guoqiang (2008): Nonlinear Pricing with Network Externalities and Countervailing Incentives.

Abstract

This paper considers the screening problem faced by a monopolist of a network good in a general setting. We demonstrate that the joint presence of asymmetric information and network externalities revise the "no distortion on the top" and "one-way distortion" principle. The pattern of consumption distortions crucially depends on the congestion of the network. It exhibits one-way distortion in un-congestible network and two-way distortion in congestible network. The countervailing incentives problem from potential entry threat is also analyzed. As the competitiveness of the outside competitors increases, the incumbent firm should adjust its nonlinear pricing scheme accordingly, which will distort the allocations of both types.

• Item Type: MPRA Paper
• Language: English
• Keywords: Nonlinear pricing, network externalities, countervailing incentives, type-dependent reservation utility
• Subjects: D - Microeconomics > D6 - Welfare Economics > D62 - Externalities; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D42 - Monopoly

References

[1] Baron, D., and R. Myerson. (1982), "Regulating a Monopolist with Unknown Costs", Econometrica, 50, 911-930.

[2] Csorba, G. (2008) : "Screening Contracts in The Presence of Positive Network Effects", International Journal of Industrial Organization, 26, 213-226.

[3] Farrell, J. and Saloner, G. (1985), "Standardization, Compatibility, and Innovation" Rand Journal of Economics, 16, 70-83.

[4] Fudenberg, D. and Tirole, J.,(2000), "Pricing a Network Good to Deter Entry" Journal of Industrial Economics, 48, 373-390.

[5] Hahn, J-H.(2003), "Nonlinear Pricing of Telecommunication with Call and Network Externalities" International Journal of Industrial Organization, 21, 949-967.

[6] Katz, M. and Shapiro, C.,(1985), "Network Externalities, Competition and Contracting. " American Economic Review, 75, 424-440.

[7] Laffont. JJ, and Martimort. D, (2002) "The Theory Of Incentives{The Principal-Agent Model" Princeton University Press

[8] Laffont. JJ, and J Tirole, (1990), "Optimal Bypass and Cream Skimming" The American Economic Review, 80 ,1042-1061.

[9] Lewis, Tracy R. and Sappington, David E. M., (1989), \Countervailing Incentives in Agency Problems", Journal of Economic Theory, 49, 294-313

[10] Maggi,G. and A, Rodriguez-Clare., 1995 "On countervailing incentives," Journal of Eco- nomic Theory, 66, 238-263.

[11] Maskin, E. and Riley, J.,(1984), "Monopoly with Incomplete Information", Rand Journal of Economics, 15, 171-196.

[12] Mendelson, H. (1985), "Pricing Computer Services: Queuing Effects" , Communications of the ACM ,28, 312-321.

[13] Mendelson, H. and Whang, S. (1990), "Optimal Incentive-Compatible Priority Pricing for the M/M/1 Queue" Operations Research, 38, 870-883.

[14] Milgrom, P. and Shannon, C. (1994), "Monotone Comparative Statistics", Econometrica, 62, 157-180

[15] Mussa, M. and Rosen, S. (1978), "Monopoly and Product Quality", Journal of Economic Theory, 18, 301-317

[16] Myerson, R. (1981), "Optimal Auction Design", Mathematics of Operations Research, 6, 58-73

[17] Oren, S., Smith, S., and Wilson, R. (1982), "Nonlinear Pricing in Markets with Interdependent Demand" , Marketing Science, 1, 287-313

[18] Rochet J-C, Stole L A., (2002), "Nonlinear pricing with random participation", Review of Economic Studies, 69, 277-311

[19] Rohlfs, J. (1974), "A Theory of Interdependent Demand for a Communication Service", Bell Journal of Economics, 10, 16-37.

[20] Segal, I., (1999), "Contracting with Externalities", Quarterly Journal of Economics, 114, 337-388

[21] Segal, I., (2003), "Coordination and Discrimination in Contracting with Externalities: Divide and Conquer", Journal of Economic Theory, 113, 147-181

[22] Sundararajan. A., (2004), "Nonlinear Pricing and Type-dependent Network Effects" Economics Letters, 83, 107-113

[23] Topkis, D. (1998), "Supermodularity and Complementarity", Princeton University Press.

[24] Westland, J. Christopher.,(1992), "Congestion and Network Externalities in the Short Run Targeting of Information System Services, " Management Science, 38 , 992-1009.