Optimal dynamic pricing of green goods under discounted network effects

  • Joana's webpage
  • Personalized pricing through targeted ads
  • Abstract: This paper deals with optimal dynamic pricing for a dominant firm selling a green good, whose consumption generates network/conformity effects. We explicitly model the accumulation process for the network, with consumers discounting differently the choices of different cohorts of consumers, as a reflection of the fact that current consumers interact more with similarly aged cohorts. With linear per-period demand, we get a unique closed-form solution for the infinite-horizon problem faced by the green good producer. The optimal pricing strategy, the evolution and the steady-state network size of the green good crucially depend on the intensity of network effects. For weak network effects, the steady-state network size is finite, whereas strong network effects lead to "universal adoption". We compare the private optimal solution to the first-best outcome patronized by a benevolent social planner choosing to maximize overall welfare in order to account for both network externalities and environmental externalities. We find that the social planner favors universal adoption more frequently (i.e. for a wider domain of network effects) than the dominant firm. We also find that even when both the dominant firm and the social planner endorse universal adoption, the network expansion is slower in the private solution than in the first-best outcome, justifying policy intervention.