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Discrimination through "Versioning" with Advertising in Random Networks

Author

Listed:
  • Antonio Jiménez-Martínez

    (Division of Economics, CIDE)

  • Óscar González-Guerra

    (Division of Economics, CIDE)

Abstract

This paper proposes a framework of second-degree discrimination with two different versions of a service that are served in random networks with positive externalities. In the model, consumers must choose between purchasing a premium version of the service or a free version that comes with advertising about a certain good (unrelated to the service). The ads attached to the free version influence the free version adopters' opinions and, given the induced effects on the good sales, they affect the optimal pricing of the premium version. We relate the optimal pricing strategy to the underlying hazard rate and degree distribution of the random network. Under increasing hazard rates, hazard rate dominance always implies higher prices for the service. In some applications of the model, decreasing hazard rates are often associated to extreme situations where only the free version of the service is provided. The model provides foundations for empirical analysis since key features of social networks can be related to their underlying hazard rate functions and degree distributions.

Suggested Citation

  • Antonio Jiménez-Martínez & Óscar González-Guerra, 2016. "Discrimination through "Versioning" with Advertising in Random Networks," Working Papers DTE 600, CIDE, División de Economía.
    • Handle: RePEc:emc:wpaper:dte600
    as

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    File URL: http://www.economiamexicana.cide.edu/RePEc/emc/pdf/DTE/DTE600.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Social networks; second-degree discrimination; advertising; degree distributions; hazard rate;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

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