Discrimination through versioning with advertising in social networks

Research Article
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Abstract

This article investigates a second-degree discrimination scheme where an online platform sells a two-version service to consumers involved in a random network. In particular, consumers choose between purchasing a premium or a free version of the service. The premium version is sold at a price and enables higher network externalities than the free version. The free version includes advertising about some product—unrelated to the service. Under the assumptions that (a) advertising rotates clockwise the inverse demand of the advertised product and (b) the platform receives a fixed portion of the revenue from the sales of the advertised product, I explore (1) how the random network, and the market conditions for the advertised product, relate to the optimal pricing of the service, and (2) the welfare implications for the platform and the consumers. Hazard rate functions are crucial for optimal pricing, and first-order stochastic dominance of the degree distribution characterizes the welfare implications. The model provides foundations for empirical analysis on degree distributions and hazard rate functions underlying complex social networks.

Keywords

Social networks Second-degree discrimination Advertising Demand rotation Degree distributions Hazard rate 

JEL Classification

D83 D85 L1 M3 

Notes

Acknowledgements

I am grateful to the Associate Editor (Rabah Amir) for his advice and encouragement, and to Oscar González, for earlier joint work in this project. For very useful feedback and valuable advice, I thank two anonymous referees, Francis Bloch, Marc Escrihuela, Benjamin Golub, Navin Kartik, Luciana Moscoso, Christopher Sánchez, Joel Sobel, Joel Watson, Jorge Zatarain, and seminar participants at UC San Diego and at the Third Conference on Network Science and Economics at Washington University, St. Louis. Part of this project was conducted while visiting the Department of Economics at UC San Diego. I am deeply grateful to this institution for its generous hospitality and support. Any remaining errors are my own.

Supplementary material

199_2018_1107_MOESM1_ESM.pdf (75 kb)
Supplementary material 1 (pdf 75 KB)

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Division of EconomicsCIDEMexico CityMexico

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