Network externalities, consumer heterogeneity, and optimal monopoly pricing

This paper analyzes the implications of network externalities on the profitability of a monopolist’s pricing strategies. It shows that when consumer heterogeneity is sufficiently high, personalized pricing results into higher profits for the monopolist compared to uniform pricing. However, for low consumer heterogeneity, uniform pricing generates more profit than price discrimination in the equilibrium if network effects are sufficiently strong. On the other hand, personalized pricing results into higher profits compared to uniform pricing if network effects are small. While network effects improve the monopolist’s profit in both the pricing regimes, the choice between uniform pricing and personalized pricing for the firm depends on the strength of network externalities and prevailing consumer heterogeneity.