Local Network Effects and Complex Network Structure

Sundararajan, Arun

doi:10.2202/1935-1704.1319

Cited by 87 publications

(32 citation statements)

References 30 publications

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“…−rt pðtÞqðtÞdt; [7] where r > 0 is her given discount rate, and q(t) evolves according to the model. The precise formulation of the maximization problem will depend on the particular cases we consider in the following sections.…”

Section: Overview Of the Modelmentioning

confidence: 99%

“…7), the rate at which consumers pay attention to products may not be constant across the population, but may be influenced by the adoption decisions of other consumers to whom one is locally "connected." This represents an interesting extension to our model of bounded rationality, one that is especially pertinent to network goods, and a direction of research we hope to pursue in the future.…”

Section: Future Research Directionsmentioning

confidence: 99%

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Dynamic pricing of network goods with boundedly rational consumers

Radner

Radunskaya

Sundararajan

2013

Proc. Natl. Acad. Sci. U.S.A.

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We present a model of dynamic monopoly pricing for a good that displays network effects. In contrast with the standard notion of a rational-expectations equilibrium, we model consumers as boundedly rational and unable either to pay immediate attention to each price change or to make accurate forecasts of the adoption of the network good. Our analysis shows that the seller's optimal price trajectory has the following structure: The price is low when the user base is below a target level, is high when the user base is above the target, and is set to keep the user base stationary once the target level has been attained. We show that this pricing policy is robust to a number of extensions, which include the product's user base evolving over time and consumers basing their choices on a mixture of a myopic and a "stubborn" expectation of adoption. Our results differ significantly from those that would be predicted by a model based on rational-expectations equilibrium and are more consistent with the pricing of network goods observed in practice.A good or service is said to display network effects, or more briefly is called a network good, if the value to each consumer of the good or service is influenced by the consumption choices made by some or all other consumers. Economic models of network goods typically assume the following "unboundedly" rational consumer behavior: Consumers immediately react to each observable strategic decision made by a seller, by forming a common expectation of demand and making their consumption choices based on this expectation, which is then realized in equilibrium. This solution is commonly referred to as satisfying "fulfilled expectations" or as a rational expectations equilibrium. In the case of a monopoly, which is the context of the present paper, the seller uses the fulfilled expectations demand function to calculate her initial profit-maximizing price, which is then held constant in time.Some notion of rationality is at the base of most current economic analysis. However, in the specific case of network goods, the requirement of rational expectations equilibrium imposes heavy demands on the cognitive abilities of consumers. Furthermore, the model typically makes predictions that are unrealistic.In this paper we explore how the predictions of models of network effects change under assumptions about consumer rationality that seem more realistic. We do so by presenting a few alternative models of a monopoly market for a service with network effects, in which (i) consumers do not (all) immediately react to every change in the seller's price and, furthermore, (ii) make their consumption choices based on a "boundedly rational" assessment of expected demand. We use these models to study the resulting dynamic pricing problem for the monopolist. The adoption choices of the consumers continuously influence the rate at which demand adjusts over time, and the monopolist therefore chooses a trajectory of prices that maximizes her discounted stream of profits.In our benchmark model, consumers ar...

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Section: Overview Of the Modelmentioning

confidence: 99%

Section: Future Research Directionsmentioning

confidence: 99%

Dynamic pricing of network goods with boundedly rational consumers

Radner

Radunskaya

Sundararajan

2013

Proc. Natl. Acad. Sci. U.S.A.

Self Cite

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“…This implies an important assumption-namely, that a user adoption decision is influenced by prior adoption decisions of all other existing users referred to as global network effects or peer-to-peer network effects [40] and denoted by N in analytical models [48,62,65]. In other words, each user in an entire installed base has the same degree of influence on all existing and potential users [91,92].…”

Section: Network Effectsmentioning

confidence: 99%

“…For example, Kakade et al [58] found that some local statistical characteristics of a social network can influence global economic factors such as price variations. In another study, Sundararajan [92] modeled local network effects by assuming that each user has incomplete information about the adoption of all other users and values adoption by only a small subset of other users in the neighborhood. His analytical models suggest that the influence of local network effects depends on the underlying social network structure.…”

Section: Network Effectsmentioning

confidence: 99%

“…This condition is particularly true for interpersonal communications technologies such as instant messengers, voice over IP (VoIP) software, or social network applications. Sundararajan [92] showed that AOL's instant messenger (AIM) users are primarily interested in connecting with a small based-namely, their friends, family, and colleagues in their social networks. Therefore, users do not receive direct benefits from other AIM users with whom they have no interest to communicate.…”

Section: Introductionmentioning

confidence: 99%

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Influences on standards adoption in de facto standardization

Techatassanasoontorn

Suo

2011

Inf Technol Manag

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In the IT industry, de facto standards emerge from standards competition as firms offer incompatible technologies, and user choices determine the outcome of the competition. The standards literature suggests that strong network effects create a bias toward a standard with a large installed base, leading to a winner-take-all outcome. More recently, several researchers have revealed that the dynamics of standardization are much more complex than the explanation offered by the economic theory of networks. Markets do not always exhibit tipping behavior so there is not always a single winner in de facto standardization; and the size of an overall installed base does not always exert a strong influence on adoption decisions. In contrast, network effects drawn from local social influence may be more salient to user adoption decisions. We ask: (1) Do we always observe a winner-take-all outcome in de facto standards competition? (2) What are the different technology adoption patterns observed in de facto standards competition? (3) What are the implications of network effects, switching costs, pricing, and functionality enhancement strategies on the outcome of de facto standards competition in different user network structures? Drawing on the economic theory of networks, the complex network theory, and previous work in the standards literature, we examine the influence of network effects, switching costs, price, and technology functionality on user adoption decisions using agent-based simulation. We incorporate underlying user network structures frequently observed in the real world as an important determining factor of user adoption decisions. Our results suggest that de facto standardization process does not always follow a three-phased S-shaped pattern. Winner-take-all is not a necessary outcome of standards competition. User network structures have a significant impact on the dynamics and outcomes of standards competition.

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Consumer Choice in Social Networks

Birke¹

2013

Social Networks and Their Economics

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Local Network Effects and Complex Network Structure

Cited by 87 publications

References 30 publications

Dynamic pricing of network goods with boundedly rational consumers

Dynamic pricing of network goods with boundedly rational consumers

Influences on standards adoption in de facto standardization

Consumer Choice in Social Networks

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