Coordination failures are pervasive in markets characterized by network externalities. However, a price discriminating seller might employ her market power to overcome the coordination problems. In this article I study how the seller uses prices to coordinate buyers in a network on the revenue maximizing outcome. I find that the seller induces a hierarchy among buyers in which some of them are assigned as “early adopters”, some as “followers” etc. My approach explains why some buyers are charged higher prices than others and how the surplus from trade is shared between the seller and the buyers. I show that inefficiencies can arise due to differences in the perceived sign of externalities across buyers. Furthermore, I derive the implications of the analysis for situations in which externalities stem from peer pressure or social comparison.
We provide a new sufficient condition for the robustness of sets of equilibria to incomplete information in the sense of Kajii and Morris (Econometrica, 1997), Morris and Ui (JET, 2005). The condition is formulated for games with a saddle function. A saddle function is a real-valued function on the set of action profiles such that there is a single player for whom minimizing the function implies choosing her best response, and for the other players maximizing the function implies choosing their best responses. In a game with a saddle function the set of correlated equilibria that induce an expectation of the saddle function greater or equal to its maximin value is robust to incomplete information.