Sequential selling and information dissemination in the presence of network effects

Date: 2014-10
By: Junjie Zhou (School of International Business Administration, Shanghai University of Finance and Economics, 777 Guoding Road, Shanghai, 200433, China)
Ying-Ju Chen (School of Business and Management & School of Engineering, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)
In this paper, we examine how a seller sells a product/service with a positive consumption externality, and customers are uncertain about the product’s/service’s value. Because early adopters learn this value, we consider the customers’ intrinsic signaling incentives and positive feedback effects. Anticipating this, the seller commits to provide price discounts to the followers, and charges the leader a high price. Thus, the profit-maximizing pricing features the cream skimming strategy. We also show that the lack of seller’s commitment is detrimental to the social welfare; nonetheless, the sequential selling still boosts up the seller’s profit. Embedding a physical network with arbitrary payoff externality among customers, we investigate the optimal targeting strategy in the presence of information asymmetry. We provide precise indices for this leader selection problem. For undirected graphs, we should simply choose the player with the highest degree, irrespective of the seller’s commitment power. Going beyond this family of networks, in general the seller’s commitment power affects the optimal targeting strategy.
Keywords: revenue management; signaling; information transmission; social networks;
JEL: D82 L14 L15