Pricing Information Goods Information goods

Hal R. Varian •costly to produce

School of Information Management and Systems •cheap to reproduce
UC Berkeley
•cost of selling x copies = cx + F
c is very small
F is very large
slides available at
http://www.sims.berkeley.edu/~hal •possible objectives for pricing:
cost recovery
profit maximization

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Example 1 Observations about example 1

Person A: willing to pay $5 for book Example 1: A wtp $5, B wtp $3, total cost=$7
Person B: willing to pay $3 for book
• efficient to produce book (benefits - costs)
cost of book = $7 fixed cost, 0 variable cost • can’t recover costs at any uniform price
• can recover costs with price differentiation

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 Example 2 Example 3

A wtp $8, B wtp $3, total cost=$7 A wtp $20, B wtp $8, total cost=$7

• welfare max => A and B both get books • uniform price + profit max =>
• uniform price + cost recovery => only A gets book
only A gets book even though B is wtp total cost of production!
• price discrimination => both get books • price discrimination =>
both get books

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Conclusions Problem with PD

Generally want to have price discrimination •Easy case: group pricing

• for profit maximization library and individual rates
• for cost recovery profit and nonprofit rates
Maximizes access •Hard case: self-selection
choose characteristics of product to induce selection
•Examples
airplane pricing: Saturday night stayover
delay: stock prices
resolution: stock photos

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 Differential pricing Academic journals

•Books American Economic Review

hardbound, library, paperback, remaindered •23,000 member subscriptions, 2,000 libraries
•Journals •how to price electronic version?
individual, library, profit, non-profit rates Worry: library subscription may be too convenient
•Film •on-site use only
first-run, hotels & airplanes, video •delay
video: purchase and rental pricing •professional version
hypertext links
current awareness
more powerful search engine

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Bundling Rationale for bundling

Sell packages of goods bundled together •Professor A

•Microsoft Office Suite will pay $120 for Journal of Addition
•journals = bundle of articles will pay $100 for Journal of Subtraction
•subscription = bundle of journals •Professor B
•bundling journals by subject matter will pay $100 for Journal of Addition
Cost reasons to bundle will pay $120 for Journal of Subtraction
many go away with electronic delivery Publisher
Marketing reasons to bundle sells journals separately gets $400
are amplified for electronic delivery sells bundle gets $440

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 Network externalities Terms and conditions

Willingness to pay for journal depends on how many other Fair use: right to copy subset of content
people read it. Cryptographic envelopes: enforce T&C
Price should reflect terms and conditions
Example of network externality liberal terms-> higher price, less sold
•fax conservative terms->low price, more sold
•email pick T&C to maximize value of IP, not max protection
•mass market software Examples
•electronic journals? library history
video history
Critical mass leads to explosive growth journals (American Geophysical Union v Texaco)

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Conclusions

Expect to see:
• different prices for different users and uses
• quality differentials to support self selection
• bundling to support cost recovery
• explosive growth after critical mass achieved
• experimentation with pricing and terms & conditions

Pricing Information Goods Page 15 Copyright  Hal R. Varian 1996