Academic journal article International Journal of Business

Optimal Pricing with Asymmetric Demands of Senders and Receivers

Academic journal article International Journal of Business

Optimal Pricing with Asymmetric Demands of Senders and Receivers

Article excerpt

I. INTRODUCTION

The issue of optimal pricing in the network industry has become very prominent over the last decade. Several papers deal with the beneficial external effects of messages to the receiver. For example a recent paper by Hermalin and Katz (2004) discuss the question of who should pay for electronic messages. They conclude that the receiving party should subsidize the sender who is generating a benefit to the receiver in order to maximize welfare and profits of the firm that supplies the connecting service between the two parties. The above conclusion was first established by Kim and Lim ((2001) and (2002)). Different pricing policy options are introduced that yield higher levels of welfare and profits, and all these are examined in the context of calls/messages externalities. In most of the papers (e.g., Kim and Lim (2001), Kim et al (2002)) the issues of positive price sharing by senders and receivers are considered especially in the context of two-way calling where either party initiates a call, such that in case of communication each individual ("party") can be a sender or a receiver. Although in general in the communication industry the initiator, i.e. the sender, is charged for the message there has recently been a trend towards a receiver based payment principle (see Jeon et. al. (2004), as originally named by Doyle and Smith (1998) and Kim and Lim (2001)) using the term receiver pays principle (RPP).

The sender-receiver market issue has been discussed by Rochet and Tirole (2004). They focused on the question of how to deal with a market where buyers and sellers need to be brought together for the market to exist, as well as on what is the nature of the pricing policy that may lead to an efficient solution. For example, the initiator of the call only gains from communication if the other party i.e., the receiver picks up the phone, thus as both parties benefit both should pay for their communication. The question as to what happens in cases where the benefits to the two sides are not positive and/or are not symmetric, as well as the resulting implications as to pricing policy were not addressed in their paper.

Rochet and Tirole (2004) discussed the differences between (pure) usage pricing and membership pricing where the externalities are created from these two different sources (usage vs. membership).

Another paper that deals with asymmetry between parties, i.e., senders and receivers, who may acquire positive or negative externalities, is that of Loder Van Alstyke and Wash (2006). The authors ask how to deal efficiently with communication between parties that arises from unsolicited and unwarranted contact (such as email spam), termed by the authors as "message pollution". Although undesired by some receivers they may be wanted and useful for others.

In their paper they deal with homogeneous senders and receivers while in our paper we discuss the network market with "dual dimension" asymmetry with different attitudes towards any contact between parties as well as the asymmetry of being a sender vs. that of being a receiver.

Lyn Squire (1973) also discusses the pricing policy that should be used in order to capture the positive external benefit of the receiver, a benefit for which the receiver usually does not have to pay. However a negative price "paid" by the caller as well as asymmetry between senders and receivers were both beyond the author's scope.

M. Armstrong (1998) suggested in his concluding remarks to extend the analysis of network competing companies to the case where subscribers are more heterogeneous and "how the outcomes are affected if networks can target high usage subscribers groups".

Carter and Wright (1999) analyzed the interconnection of price determination in the network industries where competing suppliers need to interconnect to utilize the facilities of their rivals to provide services to their final consumers. …

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