Dynamic pricing when consumers have real options

Abstract

We study optimal dynamic pricing under uncertainty in a platform ecosystem subject to technological uncertainty. We highlight that users joining the platform before the full development of the complementary goods and services obtain real options to benefit from future improvements in platform quality and network effects. The platform owner influences the network effects and equilibrium outcomes through its dynamic price policy that trades off building an earlier consumer base versus extracting rents from early adopters. A price-skimming policy is optimal when the cost of developing a complementary good is small. Interestingly, price-skimming becomes optimal when the development cost is high, as long as the value of the improved platform is either small or relatively high. For intermediate values, however, the platform adopts a price-penetration policy. Our paper provides new insights for building markets subject to the network effect under uncertainty.