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http://hdl.handle.net/2451/26169
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| Title: | Nonlinear Pricing of Information Goods |
| Authors: | Sundararajan, Arun |
| Issue Date: | Jul-2003 |
| Series/Report no.: | EC-03-16 |
| 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. |
| URI: | http://hdl.handle.net/2451/26169 |
| Appears in Collections: | Economics Working Papers
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