The Economics of Pricing Add-on Products under Duopoly Competition

Firms often offer a variety of add-on products in addition to their core information goods. How should firms offer such add-on products? When should they offer them as a bundle versus à la carte? How does competition impact firms’ bundling choice? What is the impact of regulators’ decision to limit add-on pricing on consumers’ surplus? Motivated by these questions, we develop an analytical model to examine asymmetric firms’ bundling and pricing strategy. We identify the critical role of competition in firm’s bundling decision. When there is more competition from the inferior firm, the superior firm has more incentive to bundle its add-on, even when the add-on is costly to offer. When the ratio of cost to quality is sufficiently low, the superior firm bundles as opposed to the monopoly case wherein the superior firm unbundles. We show that consumers are never better off when add-on pricing is prohibited by regulators

Personalized Pricing and Quality Differentiation on the Internet

No changes were made in the Abstract. Please use the previous Abstract that was submittedVertical Differentiation, Personalization, Price Discrimination, Electronic Commerce,

An Economic Model for Microrenting in Electronic Commerce

This paper analyzes the possibility of a monopoly firm selling and renting a packaged software product. It employs a simple model to analyze the firm\u27s pricing strategy. We observe that the introduction of the rental product leads to an increase in profits, an increase in selling and a decrease in rental prices as a function of the rate of change of the rental price with respect to the quantity sold

Personalized Pricing and Quality Differentiation

We develop an analytical framework to investigate the competitive implications of personalized pricing (PP), whereby firms charge different prices to different consumers, based on their willingness to pay. We embed personalized pricing in a model of vertical product differentiation, and show how it affects firmsâÃÂàchoices over quality. We show that firmsâÃÂàoptimal pricing strategies with PP may be non-monotonic in consumer valuations. When the PP firm has a high quality both firms raise their qualities, relative to the uniform pricing case. Conversely, when the PP firm has low quality, both firms lower their qualities. Although many firms are trying to implement such pricing policies, we find that a higher quality firm can actually be worse off with PP. While it is optimal for the firm adopting PP to increase product differentiation, the non-PP firm seeks to reduce differentiation by moving in closer in the quality space. While PP results in a wider market coverage, it also leads to aggravated price competition between firms. Since this entails a change in equilibrium qualities, the nature of the cost function determines whether firms gain or lose by implementing such PP policies. Despite the threat of first-degree price discrimination, we find that personalized pricing with competing firms can lead to an overall increase in consumer welfare.Information Systems Working Papers Serie

Personalized Pricing and Quality Differentiation

We develop an analytical framework to investigate the competitive implications of personalized pricing (PP), whereby firms charge different prices to different consumers based on their willingness to pay. We embed PP in a model of vertical product differentiation and show how it affects firms’ choices over quality. We show that firms’ optimal pricing strategies with PP may be nonmonotonic in consumer valuations. When the PP firm has high quality, both firms raise their qualities relative to the uniform pricing case. Conversely, when the PP firm has low quality, both firms lower their qualities. Although many firms are trying to implement such pricing policies, we find that a higher-quality firm can actually be worse off with PP. While it is optimal for the firm adopting PP to increase product differentiation, the non-PP firm seeks to reduce differentiation by moving in closer in the quality space. While PP results in a wider market coverage, it also leads to aggravated price competition between firms. Because this entails a change in equilibrium qualities, the nature of the cost function determines whether firms gain or lose by implementing such PP policies. Despite the threat of first-degree price discrimination, we find that PP with competing firms can lead to an overall increase in consumer welfare.NYU, Stern School of Business, IOMS Department, Center for Digital Economy Researc

Pricing and Resource Allocation in Caching Services With Multiple Levels of Quality of Service

Network caches are the storage centers in the supply chain for content delivery—the digital equivalent of warehouses. Operated by access networks and other operators, they provide benefits to content publishers in the forms of bandwidth cost reduction, response time improvement, and handling of flash crowds. Yet, caching has not been fully embraced by publishers, because its use can interfere with site personalization strategies and/or collection of visitor information for business intelligence purposes. While recent work has focused on technological solutions to these issues, this paper provides the first study of the managerial issues related to the design and provisioning of incentive-compatible caching services. Starting with a single class of caching service, we find conditions under which the profit-maximizing cache operator should offer the service for free. This occurs when the access networks’ bandwidth costs are high and a large fraction of content publishers value personalization and business intelligence. Some publishers will still opt out of the service, i.e., cache bust, as observed in practice. We next derive the conditions under which the profit-maximizing cache operator should provision two vertically differentiated service classes, namely, premium and best effort. Interestingly, caching service differentiation is different from traditional vertical differentiation models, in that the premium and best-effort market segments do not abut. Thus, optimal prices for the two service classes can be set independently and cannibalization does not occur. It is possible for the cache operator to continue to offer the best-effort service for free while charging for the premium service. Furthermore, consumers are better off because more content is cached and delivered faster to them. Finally, we find that declining bandwidth costs will put negative pressure on cache operator profits, unless consumer adoption of broadband connectivity and the availability of multimedia content provide the necessary increase in traffic volume for the caches

Personalized Pricing and Quality Differentiation

We develop an analytical framework to investigate the competitive implications of personalized pricing (PP), whereby firms charge different prices to different consumers, based on their willingness to pay. We embed personalized pricing in a model of vertical product differentiation, and show how it affects firmsâÃÂàchoices over quality. We show that firmsâÃÂàoptimal pricing strategies with PP may be non-monotonic in consumer valuations. When the PP firm has a high quality both firms raise their qualities, relative to the uniform pricing case. Conversely, when the PP firm has low quality, both firms lower their qualities. Although many firms are trying to implement such pricing policies, we find that a higher quality firm can actually be worse off with PP. While it is optimal for the firm adopting PP to increase product differentiation, the non-PP firm seeks to reduce differentiation by moving in closer in the quality space. While PP results in a wider market coverage, it also leads to aggravated price competition between firms. Since this entails a change in equilibrium qualities, the nature of the cost function determines whether firms gain or lose by implementing such PP policies. Despite the threat of first-degree price discrimination, we find that personalized pricing with competing firms can lead to an overall increase in consumer welfare.Information Systems Working Papers Serie

Personalized Pricing and Quality Differentiation

We develop an analytical framework to investigate the competitive implications of personalized pricing (PP), whereby firms charge different prices to different consumers based on their willingness to pay. We embed PP in a model of vertical product differentiation and show how it affects firms’ choices over quality. We show that firms’ optimal pricing strategies with PP may be nonmonotonic in consumer valuations. When the PP firm has high quality, both firms raise their qualities relative to the uniform pricing case. Conversely, when the PP firm has low quality, both firms lower their qualities. Although many firms are trying to implement such pricing policies, we find that a higher-quality firm can actually be worse off with PP. While it is optimal for the firm adopting PP to increase product differentiation, the non-PP firm seeks to reduce differentiation by moving in closer in the quality space. While PP results in a wider market coverage, it also leads to aggravated price competition between firms. Because this entails a change in equilibrium qualities, the nature of the cost function determines whether firms gain or lose by implementing such PP policies. Despite the threat of first-degree price discrimination, we find that PP with competing firms can lead to an overall increase in consumer welfare.NYU, Stern School of Business, IOMS Department, Center for Digital Economy Researc

Economic analysis of selling and renting software in electronic commerce

This research explores the economic rationale behind the increasing use of software rentals in the software industry in North America. The first part uses a two period game theoretic model to analyze a monopoly\u27s pricing strategy. The monopoly produces two versions of the software, one in each period. Version 2 exhibits delayed network externalities. In period 1, the software is rented and sold where as in period 2 it is only available for sale. We evaluate the impact of software rentals on consumers and overall demand. We find that prices fall in the first period and fan in the second period with increase in the intensity of the network effect. For high levels of network intensity, profits, consumer surplus and social welfare increase upon introduction of software rentals. The second part of the thesis utilizes experimental economics to explore the differences between selling and renting a durable product. Theoretical predictions about the pricing strategy of a monopoly firm selling a durable product span a range with nearly perfect competition at one end and nearly perfect price discrimination at the other. Our results lie in between the predictions of the Coase conjecture and the “Pacman theorem” of Bagnoli et al. In our posted offer markets, we find that a monopoly earns more revenue by renting than by selling a durable product. Renting eliminates the Coasian commitment problem and transforms the complicated multi-period price discrimination problem into a sequence of simpler, identical single-period decision problems. In our data when a seller is required to set both sale and rental prices, revenue is lower than under either renting or selling alone, further corroborating the view that the more complex the decision problem, the more difficulty the monopolist has in extracting rents