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Dynamic pricing of online games considering consumer preferences

Wang Tianyu;Nan Guofang;Chen Lin;College of Management and Economics, Tianjin University;  
This paper examines the optimal dynamic pricing of an online games firm facing heterogeneous consumers. The analytical solutions and optimal strategy are first derived by solving the dynamic model with pontryagin maximum principle. Then this paper investigates the impacts of marginal cost, network effects and product quality on the optimal price and profit. The results show that the firm should charge a high price if the marginal operation cost is low or the product quality is high. However, it is more profitable for the firm to charge a low price in the presence of a strong network effect. Furthermore, the result suggests that the online games firm obtains more profits by reducing operation costs, improving product quality and increasing network effects.
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