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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27798
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| Title: | Nonlinear Pricing of Information Goods |
| Authors: | Sundararajan, Arun |
| 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 |
| Issue Date: | Dec-2004 |
| Publisher: | Management Science |
| Citation: | Vol. 50, No. 12, December 2004, pp. 1660–1673 |
| Series/Report no.: | CeDER-PP-2004-03 |
| 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 usagebased 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. |
| URI: | http://hdl.handle.net/2451/27798 |
| Appears in Collections: | CeDER Published Papers
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