Value pricing in presence of network effects
| DOI | https://doi.org/10.1108/10610420210430060 |
| Date | 01 June 2002 |
| Published date | 01 June 2002 |
| Pages | 174-185 |
| Author | Dingkun Ge |
| Subject Matter | Marketing |
Value pricing in presence of
network effects
Dingkun Ge
Doctoral Student, Department of Business Administration, University
of Illinois, Champaign, Illinois, USA
Keywords Pricing strategy, Value, Pricing
Abstract Value pricing requires a marketer to price his/her product according to the value
the product brings to its user. A product with network effects makes it difficult to assess the
value of the product to its customer, thus presenting a challenge to the value pricing
principle. This paper reviews the relevant literatures in value pricing and network effects
and provides an integrated model to price products with network effects. The value of a
product with network effects is decomposed into two parts: autarky value and synchronization
value. Linearly combining the two types of values, the model can price both stand-alone
products (with synchronization value equal to zero) and network products (with or without
autarky value).
Value pricing refers to a pricing principle that prices a product or service
according to the value it brings to the user. Value pricing has been highly
favored over other pricing alternatives, such as cost mark-up, competitive
parity, because `` ...the profit potential for having a value-oriented pricing
strategy that works is far greater than with any other pricing approach''
(Monroe, forthcoming).
However, what happens if the value of the product to a user depends on the
very consumption of the user and other users using the same product? In
other words, if the value of a product is inherently dynamic and neither
customer nor producer can accurately assess the value of the product, how
can a marketer value and price his/her product? This is the case for many
products exhibiting network effects[1].
Network effect is defined as the increasing utility that a user derives from
consumption of a product as the number of other users who consume the
same product increases (Katz and Shapiro, 1985). Katz and Shapiro (1985)
identified three types of network effects: direct, indirect, and post-purchase
network effects. Telephone and fax are typical examples of products with
direct network effects. E-payment, credit card, and computer hardware and
software are examples of products with indirect network effects. The
automobile product exhibits post-purchase network effects, as the more a
particular model is sold, the easier it is to get parts and maintenance
services[2]. Products with network effects exhibit several distinct
characteristics differing from other products, such as the start-up and critical
mass problem, switching cost and lock-in, and self-reinforcing. These
characteristics require different marketing strategies in general and pricing
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The current issue and full text archive of this journal is available at
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The author would like to thank Professor Kent Monroe for comments on the earlier
draft of this paper.
Pricing according to value
to user
Meaning of network effect
174 JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 11 NO. 3 2002, pp. 174-185, #MCB UP LIMITED, 1061-0421, DOI 10.1108/10610420210430060
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