Concepedia

Optimal Dynamic Pricing For Expanding Networks

Marketing Science · 1985 · 116 citations · 10 references

TL;DR

The dynamics of network demand depend on current price and consumer anticipations of future growth. The study analyzes and characterizes an optimal dynamic pricing strategy for a monopolist selling a product whose value rises with network expansion, aiming to maximize present‑value profits. The authors model the monopolist’s pricing decision as a dynamic optimization problem, examining how growth expectations and discount rates influence equilibrium price and network size. Higher growth expectations and lower discount rates lead to a lower equilibrium price and a larger network.

Abstract

This paper analyzes the dynamic pricing decision of a monopolist marketing a new product or service whose consumption value increases with the expansion of the “network” of adopters. We characterize an optimal pricing strategy which maximizes the present value of the monopolist's profits, subject to the dynamics of the demand for network access. These dynamics depend, among other factors, on the current price and consumer anticipations about future network growth. We examine the effects of changes in the growth anticipations and the discount rate on the optimal equilibrium access price and network size. It is shown that higher growth anticipations and a lower discount rate result in a lower equilibrium price and a larger network.