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Nonlinear pricing of information goods

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  • Arun Sundararajan

    (New York University)

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 non-linear usage-based pricing scheme is always profit-improving in the presence of any non-zero 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 non-linear 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 suggests 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. The extent of 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.

Suggested Citation

  • Arun Sundararajan, 2003. "Nonlinear pricing of information goods," Industrial Organization 0307003, EconWPA.
  • Handle: RePEc:wpa:wuwpio:0307003
    Note: Type of Document - pdf; prepared on Windows NT--LaTex; pages: 43 ; figures: included
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    File URL: http://econwpa.repec.org/eps/io/papers/0307/0307003.pdf
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    References listed on IDEAS

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    1. Chuang, John Chung-I & Sirbu, Marvin A., 1999. "Optimal bundling strategy for digital information goods: network delivery of articles and subscriptions," Information Economics and Policy, Elsevier, vol. 11(2), pages 147-176, July.
    2. Varian, Hal R, 2000. "Buying, Sharing and Renting Information Goods," Journal of Industrial Economics, Wiley Blackwell, vol. 48(4), pages 473-488, December.
    3. Yannis Bakos & Erik Brynjolfsson, 1999. "Bundling Information Goods: Pricing, Profits, and Efficiency," Management Science, INFORMS, vol. 45(12), pages 1613-1630, December.
    4. Gupta, Alok & Stahl, Dale O. & Whinston, Andrew B., 1997. "A stochastic equilibrium model of internet pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 697-722, May.
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    6. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826.
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    Citations

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    Cited by:

    1. Han, Lei, 2009. "Market acceptance of cloud computing: An analysis of market structure, price models and service requirements," Bayreuth Reports on Information Systems Management 42, University of Bayreuth, Chair of Information Systems Management.
    2. Ashish Arora & Andrea Fosfuri, 2005. "Pricing Diagnostic Information," Management Science, INFORMS, vol. 51(7), pages 1092-1100, July.
    3. 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.
    4. Kartik Hosanagar & Ramayya Krishnan & John Chuang & Vidyanand Choudhary, 2005. "Pricing and Resource Allocation in Caching Services with Multiple Levels of Quality of Service," Management Science, INFORMS, vol. 51(12), pages 1844-1859, December.
    5. Wei Zhou & Selwyn Piramuthu, 2015. "Information Relevance Model of Customized Privacy for IoT," Journal of Business Ethics, Springer, vol. 131(1), pages 19-30, September.
    6. 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.
    7. James Fan & Christopher Griffin, 2014. "Optimal Digital Product Maintenance with a Continuous Revenue Stream," Papers 1412.8624, arXiv.org, revised Feb 2017.
    8. Ramnath K. Chellappa & Shivendu Shivendu, 2010. "Mechanism Design for "Free" but "No Free Disposal" Services: The Economics of Personalization Under Privacy Concerns," Management Science, INFORMS, vol. 56(10), pages 1766-1780, October.
    9. Kartik Hosanagar & John Chuang & Ramayya Krishnan & Michael D. Smith, 2008. "Service Adoption and Pricing of Content Delivery Network (CDN) Services," Management Science, INFORMS, vol. 54(9), pages 1579-1593, September.
    10. Anindya Ghose & Arun Sundararajan, 2006. "Evaluating Pricing Strategy Using e-Commerce Data: Evidence and Estimation Challenges," Papers math/0609170, arXiv.org.
    11. Ji Baek & Jan Brueckner, 2015. "Three-Part Tariffs with Heterogeneous Users: Monopoly and Duopoly Cases," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(2), pages 155-165, September.
    12. Arun Sundararajan, 2003. "Network Effects, Nonlinear Pricing and Entry Deterrence," Industrial Organization 0307002, EconWPA.
    13. Adib Bagh & Hemant K. Bhargava, 2013. "How to Price Discriminate When Tariff Size Matters," Marketing Science, INFORMS, vol. 32(1), pages 111-126, August.
    14. Stephen M. Gilbert & Sreelata Jonnalagedda, 2011. "Durable Products, Time Inconsistency, and Lock-in," Management Science, INFORMS, vol. 57(9), pages 1655-1670, September.
    15. Hemant K. Bhargava & Vidyanand Choudhary, 2008. "Research Note--When Is Versioning Optimal for Information Goods?," Management Science, INFORMS, vol. 54(5), pages 1029-1035, May.
    16. Raghuram Iyengar & Kamel Jedidi & Skander Essegaier & Peter J. Danaher, 2011. "The Impact of Tariff Structure on Customer Retention, Usage, and Profitability of Access Services," Marketing Science, INFORMS, vol. 30(5), pages 820-836, September.
    17. 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.
    18. Arun Sundararajan, 2003. "Managing Digital Piracy: Pricing, Protection and Welfare," Law and Economics 0307001, EconWPA.
    19. Ke-Wei Huang & Arun Sundararajan, 2006. "Pricing Digital Goods: Discontinuous Costs and Shared Infrastructure," Working Papers 06-11, NET Institute, revised Sep 2006.
    20. Roy Jones & Haim Mendelson, 2011. "Information Goods vs. Industrial Goods: Cost Structure and Competition," Management Science, INFORMS, vol. 57(1), pages 164-176, January.
    21. Yao Luo, 2011. "Nonlinear Pricing with Product Customization in Mobile Service Industry," Working Papers 11-28, NET Institute.
    22. Bhavik K. Pathak, 2016. "Emerging online educational models and the transformation of traditional universities," Electronic Markets, Springer;IIM University of St. Gallen, vol. 26(4), pages 315-321, November.

    More about this item

    Keywords

    nonlinear pricing; screening; digital goods; information goods; fixed-fee; usage-based pricing; transaction costs;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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