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Durable-Goods Monopolists, Network Effects and Penetration Pricing

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Abstract

We study the pricing problem of a durable-goods monopolist. With network effects, consumption externalities among heterogeneous groups of consumers generate a discontinuous demand function. Consequently, the lessor has to offer a low price in order to reach the mass market, whereas the seller has the option to build a customer base by setting a lower initial price and raise the price later in the mass market, which explains the practice of introductory pricing. Contrary to the existing literature, we show that profits from selling network goods may be higher than from leasing. Further, the seller in fact over-invests in R&D and makes the product more durable than necessary.

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  • Cyrus C.Y. Chu & Hung-Ken Chien, 2005. "Durable-Goods Monopolists, Network Effects and Penetration Pricing," IEAS Working Paper : academic research 05-A001, Institute of Economics, Academia Sinica, Taipei, Taiwan.
    • Handle: RePEc:sin:wpaper:05-a001
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    More about this item

    Keywords

    Penetration pricing; network externality;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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