Utility Tokens, Network Effects, and Pricing Power
45 Pages Posted: 12 Jun 2020 Last revised: 4 May 2023
Date Written: May 28, 2020
Abstract
We examine digital product markets where consumers are heterogeneous in their propensity to actively interact with other users, and valuations increase with the share of active users (e.g. social network platforms). We propose a model where entrepreneurs can issue digital claims (tokens) to promise exclusive access to benefits that specifically enhance the utility of active users. This allows entrepreneurs to extract consumer surplus through price discrimination. Since there is an incentive to renege on the “exclusivity” promise ex-post and expand the network of active users, the credibility of this commitment resides in a costly technology (blockchain) that embeds automatic contracts in the tokens sold and limits entrepreneurial discretion. We show that the profitability of token-based sales increases with entrepreneurial ability and with the intensity of network effects.
Keywords: ICOs, Blockchain, Venture Capital, Network Effects, Cryptocurrencies, FinTech, Adverse Selection
JEL Classification: G32, L26, D80
Suggested Citation: Suggested Citation