Pricing Information Goods: A Strategic Analysis of the Selling and Pay-per-Use Mechanisms

• Main Authors: Balasubramanian, Sridhar, BHATTACHARYA, Shantanu, Krishnan, Vish V.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2015
• Subjects: information goods; competitive strategy; pricing; digital marketing; game theory; Marketing; Operations and Supply Chain Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/4918; https://ink.library.smu.edu.sg/context/lkcsb_research/article/5917/viewcontent/PricingInfoGoodsStrategic_2012_pp.pdf
• Institution: Singapore Management University

We analyze two pricing mechanisms for information goods. These mechanisms are selling, where up-front payment allows unrestricted use, and pay-per-use, where payments are tailored to use. We analytically model a market where consumers differ in use frequency and where use on a pay-per-use basis invokes a psychological cost associated with the well known "ticking meter" effect. We demonstrate that pay-per-use yields higher profits in a monopoly provided the associated psychological cost is low. In a duopoly, one firm uses selling and the other uses pay-per-use. Here, in contrast to the monopoly, selling yields higher profits than pay-per-use. We demonstrate that, surprisingly, the profits of both duopolists can increase as the psychological cost associated with pay-per-use increases. Next, we show that uncertainty in consumer use frequency does not affect pay-per-use in a monopoly, but lowers profits from selling. In a duopoly, both the seller and the pay-peruse provider obtain lower profits when use frequency is uncertain. We also analyze how pricing mechanism performance is affected if the firms cannot commit to prices, if the pay-per-use provider offers a two-part tariff, and if consumers are risk-averse.