Optimal Pricing in the Presence of Local Network Effects

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The authors study the optimal pricing strategies of a monopolist selling a divisible good (service) to consumers that are embedded in a social network. A key feature of the model is that consumers experience a (positive) local network effect. In particular, each consumer's usage level depends directly on the usage of her neighbors in the social network structure. Thus, the monopolist's optimal pricing strategy may involve offering discounts to certain agents, who have a central position in the underlying network. The results can be summarized as follows. First, the authors consider a setting where the monopolist can offer individualized prices and derive an explicit characterization of the optimal price for each consumer as a function of her network position.