Pricing and referrals in diffusion on networks

• Published in: Games and economic behavior 2017-07, Vol.104, p.568-594
• Main Authors: Leduc, Matt V., Jackson, Matthew O., Johari, Ramesh
• Format: Article
• Language: English
• Subjects: Dynamic pricing; Network diffusion; Network games; Referral incentives; Social learning; Technology adoption; Word-of-mouth
• ISSN: 0899-8256; 1090-2473
• DOI: 10.1016/j.geb.2017.05.011

•We propose a dynamic game to study the adoption of technologies of uncertain value.•Consumers are connected by a social network.•Consumers with few (many) friends have incentives to adopt early (free ride).•Seller can induce consumers with many friends to adopt early by offering referrals.•Referrals are optimal on some networks, inter-temporal price discrimination on others. When a new product or technology is introduced, potential consumers can learn its quality by trying it, at a risk, or by letting others try it and free-riding on the information that they generate. We propose a dynamic game to study the adoption of technologies of uncertain value, when agents are connected by a network and a monopolist seller chooses a profit-maximizing policy. Consumers with low degree (few friends) have incentives to adopt early, while consumers with high degree have incentives to free ride. The seller can induce high-degree consumers to adopt early by offering referral incentives – rewards to early adopters whose friends buy in the second period. Referral incentives thus lead to a ‘double-threshold strategy’ by which low and high-degree agents adopt the product early while middle-degree agents wait. We show that referral incentives are optimal on certain networks while inter-temporal price discrimination is optimal on others.