Question

A company believes that its product will exhibit network effects if enough consumers begin to use it. How might this company decide to price its product? A. Offer the product for free early on, and increase the price later. B. Offer the product at a high price initially to attract high-WTP customers and then gradually decrease the price to make it affordable to lower-WTP customers. C. Offer the product at a price equal to the price charged by the nearest competitor. D. Set the price based on the cost of manufacturing the product.

Answer 1

Answer:

A. Offer the product for free early on, and increase the price later.

Explanation:

Network effect occurs when the value of a product or service increases as more people use it.

For a company that believes its product will exhibit network effects and wants to get as many customers as possible to use the product, it is best to offer the product for free to create a buzz around the product.

This increases the chances of the people becoming aware of the product.

With time, the company can increase the price of the product as people will be willing to pay for it because they consider it to be valuable.