Mixed Versioning of Information Goods Under Incomplete Information

Information goods such as computer software or electronic newspapers can be provided by firms at a low marginal cost, while in many cases large capital outlays are required to produce their first unit. The substantial setup cost is thereby mainly driven by the cost of developing the top quality product. Having established this ìflagshipî product, a firm can degrade it or in other ways modify it, and in this way create a multitude of products at a small ìversioningî cost. Finding optimal versioning strategies for information goods is becoming increasingly important for Internet commerce, as low distribution costs and newfound customer intimacy render intricate second-degree price discrimination strategies feasible

Nonlinear pricing of information goods

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

Delayed Multiattribute Product Differentiation

We develop a two-stage model for versioning products with respect to both vertical and horizontal attributes. At first, a firm positions its top-quality “flagship” product in a market with an imperfectly known distribution of tastes and reservation prices. In the second stage, the firm learns these consumer characteristics and has the option of extending its product line by versioning the flagship product using pure horizontal differentiation, quality degrading, or both. The firm's nonconvex versioning problem is solved analytically for the two-product case. We find that ex ante extending the product line through vertical differentiation is optimal for low marginal cost of quality (development cost); otherwise pure horizontal differentiation is superior. Given quasilinear consumer preferences and a uniform distribution of consumer characteristics, versioning with respect to both horizontal and vertical attributes is never optimal. Under delayed differentiation the optimal policy is contingent on the observed demand realization and may lead to horizontal cannibalization and price dispersion for equal-quality products. The firm tends to increase its investment in product quality unless it adopts a state-contingent policy of horizontal versioning for high and vertical versioning for low demand realizations. Following a state-contingent policy, the optimal upfront development effort may be significantly lower than under full ex-ante commitment. The option value of delayed differentiation is generally nonmonotonic in the firm's development cost