Roch Guerin - Pricing network services with strong externalities - A representative example

We live in a world with ubiquitous connectivity. This has given rise to the emergence of a variety of new services either enabled by connectivity or meant to improve it. Many of those services have in common that their "value" is not just intrinsic, but also depends on connectivity, i.e., it includes so called network effects or externalities. The presence of externalities in services or products is not new, but in networks they arise nearly systematically and often in unexpected combinations. This talk uses a representative service, user provided connectivity or UPC, to illustrate and to some extent elucidate the type of interactions that can arise, and their effect on service adoption as well as pricing decisions. In particular, it shows how the heterogeneity in valuation that externalities generate introduces significant challenges in both controlling service adoption and pricing it effectively. It also shows the inherent fragility of pricing solutions, where small errors in parameter estimation can significantly affect adoption. The results demonstrate the complex interactions that networks services are subject to, and to some extent the inherent difficulty of predicting their success. This is joint work with M. H. Afrasiabi.