Competition and diffusion in networks

Abstract

The present work aims to study the marketing and competition functions of an inter-temporal pricing policy on a durable product with unknown quality. Pricing policies consist of price discounts and referral payments. The product in question must be introduced by a company to a group of consumers connected through a social network. At the same time, the company faces the threat of entry of a substitute product whose quality is known by the group of prospects. Social connections allow communication via Word of Mouth between early and late consumers, so that the company can introduce incentives through its pricing policy to ensure that information is diffused optimally. In the meantime, prices and referrals send signals to entrants about the level of competition in the market. For this reason, companies of this kind of products must design their pricing policies to find the balance between being known and being competitive. In this dissertation I propose a normative framework to design this kind of policies and assess their possible impact on the benefit of consumers and companies. To achieve this objective, I present a model of duopoly competition in social networks between two products of different quality. To simplify the analysis and impose realistic cognitive burdens over agents, mean field approximations of the proposed model are made. In first place, this study provides guidelines for the design of these policies that take into account the level of information on product quality and the distribution of degrees (number of connections that a person has in the social network) that characterizes the social network. Secondly, a calculation is also made of the demands expected by the incumbent company and the entrant company that also depend on the degree of symmetry of information that these companies share with each other. Thirdly, the impact on the diffusion of the incumbent product is characterized according to the price of competition, whether a discount or a referral policy is implemented, the degree distribution and the degree of a specific customer.