SNA Group Project

Full Marks 50 (out of 100 for the course)

Groups (Four members per group): Already formed.
Project Title: Pricing under network effects in the real
estate context
Learning Goal: To appreciate and demonstrate how
positive network effect operates in the market.

The Problem Description (elaborated in class as well):

IIM Calcutta campus is located at the southern city
boundary of Kolkata. If one goes further south
along Diamond Harbour Road one would see the
villages of the district of South 24 Parganas. Over
time the real estate prices within Kolkata city limits
have been skyrocketing. This led to real estate
constructions at the city periphery and beyond. The
amenities such as schools, hospitals, sewerage,
good roads, public transportation, shopping
complexes, spread of electrification etc at places
beyond city limits are usually inferior to their city
counterparts and consequently, the real estate
prices reduce significantly as one moves away from
the city. However, as a large number of housings
are set up at a relatively remote location even with
inadequate support infrastructure, the necessary
utilities such as roads, shopping malls may get
developed by the Government and/or interested
private players depending on demand created by
people who may buy properties there. If such
infrastructure developments take places real estate
prices in that area increase and initial investors see
their property prices appreciate. In contrast, if not
many people buy properties there then
infrastructure development may slow down
consequent to which real estate prices do not go up
and may even come down as the place may not
considered a very promising option for investment.
In summary, the prospect of appreciation depends
much on how many others would invest in land or
properties of the region.

Suppose, as a business venture, in one such under-

developed area about ten kilometres further south
of IIM Calcutta campus, you have purchased a huge
area of land from local people and have
demarcated plots for individual housing. Of course,
you planned and kept necessary spaces for future
roads and other common utilities for would be
inhabitants. Considering your total cost of
procurement, your average cost per saleable plot of
land turned out to be INR 40,00000. There are
1000 such plots and your plan is to sell those plots
and maximise your profit thereof. All plots are of
equal size and value.
Land price there is a matter of speculation on
future infrastructure development prospects and
consequent demand from other prospective buyers
as explained.

There are 2,000 prospective buyers of plots each of

whom may buy a plot provided, of course, he finds
the price acceptable.
Each buyer has a reservation price, that is, the
maximum price he is willing to pay, for a plot. A
buyer buys a plot if and only if the offered sale price
is no more than his reservation price.
Assume no two buyers have the same reservation
price. Imagine buyers have been sorted in
descending order of their reservation prices and
they have been identified by their serial numbers
(1-2000) accordingly. That is, buyer 1 has the
highest reservation price, buyer 2 has the second
highest, and so on, buyer 2000 has the least
reservation price. Suppose, buyer k is represented
by the real number k/2000 along the x-axis, where
k=1,2,…,2000. For example, buyer 5 will be
represented by the point 5/2000=0.0025 on the x-
axis.
To get a sense of distribution of the reservation
prices of buyers assume the function R(x) gives the
reservation price of the buyer represented by the
real number x. The highest reservation price, that is
the reservation price of buyer 1, that R(0.0005) is
Rmax, and the minimum reservation price, that is,
reservation price of buyer 2000, that is R(1) is R min.
For example, one may assume Rmin=25,00000 and
Rmax=60,00000. You may assume R() is a
monotonically decreasing continuous function in
the interval [0,1]. Exact form of R() would depend
on the prospective buyers and their thought
process! Try out at least three functions for R(),
including one quadratic, and two exponential
functions (one decreasing fast initially and the
other decreasing slowly, say) satisfying the
boundary conditions.
The price of a plot is subject to positive network
effect – as more and more people buy plots the
demand and hence market price of each plot
increases. So, the effective reservation price of an
individual for a plot a combination of both these
factors. If R(x) is the reservation price of
prospective buyer x as explained above, and f(z) is
the network effect factor when z fraction of 1000
plots have been sold (that is, when 1000*z buyers
have purchased a plot each; z is between 0 and 1)
then the effective reservation price of buyer x for a
plot becomes R(x)*f(z). Exact form of f() would
depend on prospective buyers! Assume the
function f() is a strictly monotonically increasing
continuous function in the interval [0,1] with the
property that f(0.0005)=fmin and f(1)=fmax. For
example, one may assume fmin=1 and fmax=3 (try
with other values of fmin and fmax during your
simulation). Try at least three forms of f() including
one quadratic, and two exponential functions (one
increasing fast initially and the other increasing
slowly, say) satisfying the boundary conditions.
Pricing for your business proposition:
Suppose, you propose the following pricing scheme:
You will make an early bird offer price of p1 per plot
valid for one week only. Buyers would have to
make full deposit of p1 within the week for
purchasing a plot and it’s non-refundable. People
who buy plots within this week do so based on their
reservation price R() without factoring in network
effect. That is, assume the effective reservation
price of buyer represented by x is same R(x), that is
f() factor is 1 at this early bird offer stage. For
example, you may take, p1= INR 35,00000 (later try
with other values of p1 in the range INR 20,00000
to INR 60,00000 as well).

By the end of the early bird offer week the number

of plots sold has become known to everybody and
so network effect kicks in. At this time you raise the
price of a plot to p2 and advertise for continuing
sale. For an example, you may set p2= INR
50,00000 (your challenge is to choose the best
value for p2). Any prospective buyer this time
onwards takes his purchase decision based on his
effective reservation price. As soon as any new
buyer buys a plot that too becomes public
information (that is, z and hence effective
reservation prices of prospective buyers change
accordingly as the total number of plots sold so far
remain known at any time thereafter). Buyers may
assume this known sale and hence z or they may
speculate a value of z. Once they have a z in their
mind the effective reservation price gets computed
 accordingly. Try out various error margins of the
speculated z against the true z in your simulations.

Scope of the Project: You need to do the following:

(a) Choose various functions R() and f(), and various
parameters such as fmin, fmax, Rmin, Rmax, p1, and p2
satisfying the broad constraints mentioned.
Also, try out different speculations on z. For a
particular choice of functions and parameters,
do the simulation and visually demonstrate the
network effect, the number of plots that get
sold and the buyers who buy in sequence, total
number of plots eventually sold, and your net
revenue from the sale and hence your profit (or
loss). Find out from your simulation experiments
what would be your best choice of p1 and p2
toward maximizing your revenue under realistic
choice of all other problem parameters. For a
superior contribution to the project you may try
to demonstrate other pricing schemes (such as
three stage or multistage pricing instead of two
stage p1/p2 pricing as proposed above, and
whether all prospective buyers speculate the
same value of z or different values of z etc) for
maximizing your revenue. Your superior
performance would be demonstrated by your
 practical choice of functions and parameters,
your demonstration of network effect, and
hence your optimal pricing scheme. Feel free to
make and state any minor addition or
modification to the problem definition in the
interest of your demonstration.

Evaluation related guidelines:

(i) All members of the team are expected to
contribute to the project bearing comparable
workloads. By default, all members would be
given the same score in the project. However,
any complaint received about deficient
contribution by any group member will be
dealt with appropriately which may lead to
differential scores within a group.
(ii) Netlogo will be the recommended software
tool to use. Any other software(s) may be
used as well. However, in that case the onus is
on you to ensure the same is loaded and
functional in the classroom PC. Source codes
attached with the final report must be readily
executable and the same code should be run
in the final presentation.
 (iii) Group numbers and members’ names and
registration numbers must be mentioned at
the beginning of the project report.
(iv) All submissions should be uploaded by the
group leader keeping other group members
duly informed.

Project Report Submission and Presentation Dates

and Guidelines

Project Report Submission: To be uploaded by 18

November 2024.
The following are to be uploaded (the link for
submission will be provided by Shovan later):
(a) A pdf report of no more than five pages that
describes your project experience (conception
to implementation) detail addressing how you
handled the Scope of the Project. Clearly
mention different functions and parameters
tried out and the price scheme that optimized
your revenue demonstrating the sale
sequence.
(b) The executable source code(s) of software(s)
used such as Netlogo etc that can be run and
cross-verified at our end, if felt necessary.
 (c) The presentation (ppt file) that you will make
on 19th November.

The Presentation (to be done in class on 19 November

2024):
Prepare a presentation for five minutes only. All
members must be present for Q&A. It’s not
mandatory for each member to participate in the
presentation particularly because of time
restriction.
To make best use of your precious five minutes
please do the following:
(i) Preload your .ppt file into the classroom
machine before the class hours.
(ii) Preload and test your demonstration in the
classroom machine before the class hours.
Any time you waste in handling (i) or (ii) during your
presentation slot will eat up from your valuable five
minutes.
There is absolutely no need to spend any time
describing the problem or any theory etc during your
presentation. Without any prelude introduce your
group members by name and start the
demonstration and addressing the Scope of the
 Project mentioned above, elaborating and justifying
the functions and parameters used, and your
revenue maximization pricing scheme and outcome.

Support you may need

 Please contact Mr. Shovan Dutta, Academic
Associate, ([email protected]), for any
issue regarding report submission logistics, group
related issue etc.
 Please contact me ([email protected]) and seek
an appointment in case you need any clarification
regarding the project.
 You may find Network Effects (Chapter 17 of your
Text Book and references therein) useful for a
meaningful project.
Caution
Do not request for any extension or rescheduling of
your submission or presentation. It will not be
entertained except under any emergency for anyone
that may be communicated to us by the MBA office.
Plan your work schedule accordingly.