Discrimination through versioning with advertising in social networks

This article investigates a second-degree discrimination scheme where an online platform sells a two-version service to consumers involved in a random network. In particular, consumers choose between purchasing a premium or a free version of the service. The premium version is sold at a price and enables higher network externalities than the free version. The free version includes advertising about some product—unrelated to the service. Under the assumptions that (a) advertising rotates clockwise the inverse demand of the advertised product and (b) the platform receives a fixed portion of the revenue from the sales of the advertised product, I explore (1) how the random network, and the market conditions for the advertised product, relate to the optimal pricing of the service, and (2) the welfare implications for the platform and the consumers. Hazard rate functions are crucial for optimal pricing, and first-order stochastic dominance of the degree distribution characterizes the welfare implications. The model provides foundations for empirical analysis on degree distributions and hazard rate functions underlying complex social networks.