Nonlinear Pricing with Network Externalities and Countervailing Incentives∗

This paper considers the screening problem faced by a monopolist of a network good in a general setting. We demonstrate that the joint presence of asymmetric information and net-work externalities revise the “no distortion on the top ” and “one-way distortion ” principle. The pattern of consumption distortions crucially depends on the congestion of the network. It exhibits one-way distortion in un-congestible network and two-way distortion in congestible network. The countervailing incentives problem from potential entry threat is also analyzed. As the competitiveness of the outside competitors increases, the incumbent firm should ad-just its nonlinear pricing scheme accordingly, which will distort the allocations of both types