Nonlinear pricing and type-dependent network effects

This paper analyzes optimal monopoly pricing under incompleteinformation for a good that displays positive network effects. Incontrast with standard models of network effects (Katz and Shapiro,1985), the good modeled in this paper is consumed in variable quantitiesby heterogeneous customers, and the magnitude of the network effectstherefore depends on the total quantity consumed across customers,rather than the total number of adopters. In addition, the value eachcustomer gets on account of the network effects depends on thecustomer’s individual consumption, as well as the customer’stype. Examples of products that fit this description at least partiallyinclude corporate desktop software (where customers are corporations ofvarying sizes, with varying intensity of software usage acrossemployees) and online trading services (such as those offered by eBay,where network effects increase with increased trading volume).