Opaque pricing strategy with social network effects

Abstract

Several payment platforms have recently implemented new forms of opaque discount policies, however, merchants do not have a clear dominant strategy. This paper first studies the impact of a social network on the opaque pricing strategies of a monopolistic merchant in an e-commerce market. We present a two-stage pricing-consumption game in which the merchant and consumers interact on a social network. In this setting, the monopolistic merchant chooses an optimal opaque discount strategy with full knowledge of consumer characteristics and the social network structure. The consumers, facing this opaque pricing policy, purchase optimal amounts of goods based on maximizing utility. Additionally, this paper introduces a series of bounded opaque discount disclosure strategies and determines the optimal strategy for merchants when consumers have different beliefs. Specifically, when consumers have strong beliefs about bounded opaque discounts, merchants should disclose the upper bound of the discount, and when consumer beliefs are weaker, the lower bound should be disclosed. Furthermore, we also explore individual consumer behavioral biases, such as overconfidence and fairness concerns, and their interactions with social networks on merchants’ opaque discount strategies. The findings indicate that merchants can leverage an understanding of consumer social network structures to implement strategic price discrimination targeting consumers with bounded rationality. However, the presence of these behavioral biases does not necessarily lead to an increase in profits gained by merchants through social networks.