Mobile Social Services with Network Externality: From Separate Pricing to Bundled Pricing

TL;DR

This paper compares separate, bundled, and hybrid pricing strategies for selling devices with complementary social services exhibiting network externalities, analyzing their benefits through game theory in physical and virtual sharing models.

Contribution

It provides a comprehensive theoretical comparison of pricing strategies for device and service bundles under different sharing models with network externalities.

Findings

Bundled pricing outperforms separate pricing when costs are low in physical sharing.

Hybrid pricing dominates bundled pricing by maintaining high margins.

In virtual sharing, hybrid pricing reduces to bundled pricing when network externality is strong.

Abstract

Today, many wireless device providers choose to sell devices bundled with complementary mobile social services, which exhibit strong positive network externality. This paper aims to quantify the benefits of selling devices and complementary services under the following three strategies: separate pricing, bundled pricing, and hybrid pricing (both the separate and bundled options are offered). A comprehensive comparison of the above three strategies is carried out for two popular service models, namely physical connectivity sharing and virtual content sharing, respectively. We first study the physical service model where the provider (e.g., FON) offers users customized WiFi devices for indoor Internet access, and allows service subscribers to physically access all device owners' WiFi when traveling. Observing that all device-owners contribute to the connectivity sharing, we show, via a Stackelberg game theoretic approach, that bundled pricing outperforms separate pricing as long as the total cost of device and service is reasonably low to stimulate network externality. Further, hybrid pricing strictly dominates bundled pricing thanks to the pricing flexibility to keep high marginal profit of device-selling. Next, we investigate the virtual sharing service model where the provider (e.g., Apple) sells devices and device-supported applications. Different from the connectivity service model, in this model service subscribers directly contribute to the virtual content sharing, and the network externality can be fairly strong. We prove that hybrid pricing degenerates to bundled pricing if the network externality degree is larger than the average device valuation, which is in stark contrast with the connectivity service model in which hybrid pricing always outperforms bundled pricing.