This paper consider a monopolist’s product-launch strategy in the presence of network effects, focusing on how to exploit these effects to the maximum possible extent. In our formal framework, the firm sets a price for its product and chooses a sales scheme, which effectively determines the extent to which consumers can learn from each other about the product’s popularity. The results allow us to rank various sales schemes in terms of profitability, and in particular to identify the optimal scheme. We relate these formal results to a variety of managerial decisions that are relevant in practice for product launch. Specifically, in order to best exploit network effects, our results provide support for releasing pre-order and sales information to consumers, sequential product launch across markets, serving smaller markets before larger ones, targeting independent-minded consumers, and favoring pre-release consumer communication.
(joint work with Nick Vikander)