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Nonlinear Pricing of Information Goods

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  • Arun Sundararajan

    ()
    (Leonard N. Stern School of Business, New York University, 44 West 4th Street, New York, New York 10012, http://oz.stern.nyu.edu/")

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    Abstract

    This paper analyzes optimal pricing for information goods under incomplete information, when both unlimited-usage (fixed-fee) pricing and usage-based pricing are feasible and administering usage-based pricing may involve transaction costs. It is shown that offering fixed-fee pricing in addition to a nonlinear usage-based pricing scheme is always profit improving in the presence of nonzero transaction costs, and there may be markets in which a pure fixed-fee is optimal. This implies that the optimal pricing strategy for information goods is almost never fully revealing. Moreover, it is proved that the optimal usage-based pricing schedule is independent of the value of the fixed fee, a result that simplifies the simultaneous design of pricing schedules considerably and provides a simple procedure for determining the optimal combination of fixed-fee and nonlinear usage-based pricing. The introduction of fixed-fee pricing is shown to increase both consumer surplus and total surplus. The differential effects of setup costs, fixed transaction costs, and variable transaction costs on pricing policy are described. These results suggest a number of managerial guidelines for designing pricing schedules. For instance, in nascent information markets, firms may profit from low fixed-fee penetration pricing, but as these markets mature, the optimal pricing mix should expand to include a wider range of usage-based pricing options. Minimum fees, quantity discounts, and adoption levels across the different pricing schemes are characterized, strategic pricing responses to changes in market characteristics are described, and the implications of the paper's results for bundling and vertical differentiation of information goods are discussed.

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    File URL: http://dx.doi.org/10.1287/mnsc.1040.0291
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 50 (2004)
    Issue (Month): 12 (December)
    Pages: 1660-1673

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    Handle: RePEc:inm:ormnsc:v:50:y:2004:i:12:p:1660-1673

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    Related research

    Keywords: pricing; price discrimination; information goods; digital goods; adverse selection; screening; principal agent; incentives; mechanical design; incentive compatible; monopoly; incomplete information; second-degree price discrimination; two-part tariff; vertical differentiation; software; Internet;

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    Cited by:
    1. Wu, Dachrahn & Liu, Nien-Pen, 2007. "Why do amusement parks only charge a fixed admission fee?," Economics Letters, Elsevier, vol. 95(2), pages 180-185, May.
    2. Bhargava, Hemant K. & Sun, Daewon, 2008. "Pricing under quality of service uncertainty: Market segmentation via statistical QoS guarantees," European Journal of Operational Research, Elsevier, vol. 191(3), pages 1189-1204, December.
    3. Ke-Wei Huang & Arun Sundararajan, 2006. "Pricing Digital Goods: Discontinuous Costs and Shared Infrastructure," Working Papers 06-11, NET Institute, revised Sep 2006.
    4. Anja Lambrecht & Katja Seim & Naufel Vilcassim & Amar Cheema & Yuxin Chen & Gregory Crawford & Kartik Hosanagar & Raghuram Iyengar & Oded Koenigsberg & Robin Lee & Eugenio Miravete & Ozge Sahin, 2012. "Price discrimination in service industries," Marketing Letters, Springer, vol. 23(2), pages 423-438, June.
    5. Chhabra, Meenal & Das, Sanmay & Sarne, David, 2014. "Expert-mediated sequential search," European Journal of Operational Research, Elsevier, vol. 234(3), pages 861-873.
    6. Wang, Judith Y.T. & Lindsey, Robin & Yang, Hai, 2011. "Nonlinear pricing on private roads with congestion and toll collection costs," Transportation Research Part B: Methodological, Elsevier, vol. 45(1), pages 9-40, January.

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