Unobserved preferences and dynamic platform pricing under positive network externality
|Author:||Huuki, Hannu1,2; Svento, Rauli1|
1Oulu Business School, Department of Economics, Accounting and Finance, University of Oulu, P.O. Box 4600, 90014, Oulu, Finland
2Finnish Environment Institute, University of Oulu, P.O. Box 413, 90014, Oulu, Finland
|Online Access:||PDF Full Text (PDF, 1.2 MB)|
|Persistent link:|| http://urn.fi/urn:nbn:fi-fe202102023545
|Publish Date:|| 2021-02-02
We study the dynamic optimization of platform pricing in industries with positive direct network externalities. The utility of the network for the consumer is modeled as a function of three components. Platform price and participation rate affect the consumer’s decision to join the platform. The platform operator is assumed to know the consumer’s sensitivities with respect to these components. In addition, the consumer’s utility is a function of other attributes, such as network privacy policies and environmental effects of the service. We assume that the distribution of these unobserved preferences in the potential customer base is known to the platform operator. We show analytically how the unobserved preferences affect the dynamic platform price design. Both static and rational expectations with respect to the platform participation are presented. We simulate an electricity market demand side management service application and show that the platform operator sets low prices in the launch phase. The platform operator can set higher launching prices if it can affect customers’ preferences, expectations or adjustment friction.
|Type of Publication:||
A1 Journal article – refereed
|Field of Science:||
© The Author(s) 2020. Open access funding provided by University of Oulu including Oulu University Hospital. Funding from the Academy of Finland Strategic Research Council project BCDC Energy (AKA292854) and Academy of Finland project EcoRiver (323810) is gratefully acknowledged.
|Academy of Finland Grant Number:||
292854 (Academy of Finland Funding decision)
323810 (Academy of Finland Funding decision)
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