Considering customer lifetime network value in oligopoly markets with the use of game theory approach

Abstract

This research proposes a model that calculates the customer lifetime value and simultaneously considers the network effects. An oligopoly market is also considered in which companies compete with each other. Each company has a number of buyers and sellers and offers its services to the buyers free while receiving the sellers' membership fees in return. Interestingly, the customers interact with each other and change the compa-nies' clients. This interaction between them is known as word-of-mouth marketing, and it also exists among the sellers. It is noteworthy that the existence of both buyers and sellers is only meaningful. Indeed, the increase of buyers leads to a rise in the number of sellers and also makes the company more profitable. In fact, the network effects are categorized into four forms that are as follows: (1) buyers’ effects on each other, (2) sellers’ effects on each other, (3) buyers’ effects on sellers, and (4) sellers’ effects on their buyers. These effects are the main factors that the companies tend to take into consideration when determining the optimal marketing and pricing policies. Applying differential game theory makes it possible to receive the companies' market share, advertis-ing, and pricing strategy. Besides, two numerical examples and sensitivity analyses are provided to demonstrate the proposed model. Finally, it was found that making the network effects stronger leads to less need for adver-tising and attracting more customers; thus, the total costs are minimized.