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Dynamic Network-Based Discriminatory Pricing

Author

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  • G. E. Fruchter

    (Bar-llan University)

  • R. C. Rao

    (University of Texas at Dallas)

  • M. Shi

    (University of Toronto)

Abstract

We study the dynamic pricing decisions for competitive network service providers. We assume that each competing firm follows a three-part pricing scheme, which consists of an ongoing membership fee, a usage fee for communications within the networks, and another usage fee for communications across the networks. The difference between the two usage fees is the network-based price discount that allows price discrimination. We study the firms problems as a differential game and establish the optimal pricing policy as a Nash equilibrium feedback strategy depending on only the network sizes (i.e., the number of subscribers). We compare the dynamic network-based discount with the static discount. In the special case of a uniform calling pattern, we find that the firm network-based dynamic discount is always lower than the static discount; we find also that the firm that has a larger network can offer a bigger discount. These results are useful particularly for managers. To get further insights into the dynamic pricing policies, we explore the case of symmetric competition using numerical simulation.

Suggested Citation

  • G. E. Fruchter & R. C. Rao & M. Shi, 2006. "Dynamic Network-Based Discriminatory Pricing," Journal of Optimization Theory and Applications, Springer, vol. 128(3), pages 581-604, March.
    • Handle: RePEc:spr:joptap:v:128:y:2006:i:3:d:10.1007_s10957-006-9033-8
    DOI: 10.1007/s10957-006-9033-8
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    References listed on IDEAS

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    Cited by:

    1. Fruchter, Gila E. & Sigué, Simon P., 2013. "Dynamic pricing for subscription services," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2180-2194.
    2. Ferrer, Juan-Carlos & Mora, Hugo & Olivares, Francisco, 2010. "On pricing of multiple bundles of products and services," European Journal of Operational Research, Elsevier, vol. 206(1), pages 197-208, October.

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