201 research outputs found
Managing Digital Piracy: Pricing, Protection and Welfare
This paper analyzes the optimal choice of pricing schedules and technological deterrence levels in a market with digital piracy, when legal sellers can sometimes control the extent of piracy by implementing digital rights management (DRM) systems. It is shown that the seller's optimal pricing schedule can be characterized as a simple combination of the zero-piracy pricing schedule, and a piracy-indifferent pricing schedule which makes all customers indifferent between legal consumption and piracy. An increase in the level of piracy is shown to lower prices and profits, but may improve welfare by expanding the fraction of legal users and the volume of legal usage. In the absence of price- discrimination, the optimal level of technology-based protection against piracy is shown to be the technologically-maximal level, which maximizes the difference between the quality of the legal and pirated goods. However, when a seller can price-discriminate, it is always optimal for them to choose a strictly lower level of technology-based protection. Moreover, if a DRM system weakens over time, due to its technology being progressively hacked, the optimal strategic response may involve either increasing or decreasing the level of technology-based protection and the corresponding prices. This direction of change is related to whether the technology implementing each marginal reduction in piracy is increasingly less or more vulnerable to hacking. Pricing and technology choice guidelines based on these results are presented, some social welfare issues are discussed, and ongoing work on the role of usage externalities in pricing and protection is outlineddigital piracy, digital rights management, DRM, information goods, nonlinear pricing, screening, type-dependent participation constraints, copyright, IP, intellectual property
Network Effects, Nonlinear Pricing and Entry Deterrence
A number of products that display positive network effects are used in variable quantities by heterogeneous customers. Examples include corporate operating systems, infrastructure software, web services and networking equipment. In many of these contexts, the magnitude of network effects are influenced by gross consumption, rather than simply by user base. Moreover, the value an individual customer derives on account of these network effects may be related to the extent of their individual consumption, and therefore, the network effects may be heterogeneous across customers. This paper presents a model of nonlinear pricing in the presence of such network effects, under incomplete information, and with the threat of competitive entry. Both homogeneous and heterogeneous network effects are modeled. Conditions under which a fulfilled-expectations contract exists and is unique are established. While network effects generally raise prices, it is shown that accompanying changes in consumption depend on the nature of the network effects -- in some cases, it is optimal for the monopolist to induce no changes in usage across customers, while in others cases, network effects raise the usage of all market participants. Optimal pricing is shown to include quantity discounts that increase with usage, and may also involve a nonlinear two-part tariff. These results highlight the impact of network effects on the standard trade-off between price discrimination and value creation, and have important implications for pricing policy. The threat of entry generally lowers profits for the monopolist, and increases customer surplus. When network effects are homogeneous across customers, the resulting entry-deterring monopoly contract is a fixed fee and results in the socially optimal outcome. However, when the magnitude of heterogeneous network effects is relatively high, there are no changes in total surplus induced by the entry threat, and the price changes merely cause a transfer of value from the seller to its customers. The presence of network effects, and of a credible entry threat, are also shown to increase distributional efficiency by reducing the disparity in relative value captured by different customer types. Regulatory and policy implications of these results are discussed.network externalities, network externality, non-linear pricing, screening, adverse selection, price discrimination, information goods, software pricing, Microsoft
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
Evaluating Pricing Strategy Using e-Commerce Data: Evidence and Estimation Challenges
As Internet-based commerce becomes increasingly widespread, large data sets
about the demand for and pricing of a wide variety of products become
available. These present exciting new opportunities for empirical economic and
business research, but also raise new statistical issues and challenges. In
this article, we summarize research that aims to assess the optimality of price
discrimination in the software industry using a large e-commerce panel data set
gathered from Amazon.com. We describe the key parameters that relate to demand
and cost that must be reliably estimated to accomplish this research
successfully, and we outline our approach to estimating these parameters. This
includes a method for ``reverse engineering'' actual demand levels from the
sales ranks reported by Amazon, and approaches to estimating demand elasticity,
variable costs and the optimality of pricing choices directly from publicly
available e-commerce data. Our analysis raises many new challenges to the
reliable statistical analysis of e-commerce data and we conclude with a brief
summary of some salient ones.Comment: Published at http://dx.doi.org/10.1214/088342306000000187 in the
Statistical Science (http://www.imstat.org/sts/) by the Institute of
Mathematical Statistics (http://www.imstat.org
Electronic Markets, Search Costs and Firm Boundaries
We study how firm boundaries are affected by the reduction in search costs when business-to-business electronic markets are adopted. Our paper analyzes a multi-tier industry in which upstream parts suppliers incur procurement search costs, and downstream manufacturers incur incentive contracting costs with these parts suppliers. We develop a model that integrates search theory into the hidden-action principal-agent model and characterize the optimal contract, showing that the delegation of search results in an outcome analogous to an effective increase in the search cost of the intermediary, reflected in the magnitude of the cutoff price in the second-best stopping rule. This contract is used to specify the manufacturer's make versus buy decision, and to analyze how the technological changes associated with electronic markets affect vertical organizational scope. Our main results show that when search is information-intensive, electronic markets will result in constant decreases in search costs that reduce the vertical scope of organizations. In contrast, when search is communication-intensive, electronic markets will result in proportionate reductions in search costs that lead to an increase in vertical integration; the latter outcome also occurs if search costs converge. We also discuss the implications of our results for the general problem of designing contracts that optimally delegate costly search to an intermediaryfirm boundaries, vertical integration, search, moral hazard, incentives, principal-agent, electronic markets, B2B markets.
Networks Effects, Nonlinear Pricing and Entry Deterrence
A number of technology products display positive network effects, and are used in
variable quantities by heterogeneous customers. Examples include operating systems, infrastructure
and back-end software, web services and networking equipment. This paper studies optimal
nonlinear pricing for such products, under incomplete information, and with the threat of competitive
entry. Both homogeneous and heterogeneous network effects are modeled. Conditions under
which a fulfilled-expectations contract exists and is unique are established. While network effects
generally raise price, it is shown that accompanying changes in consumption depend on the nature
of the network effects - in some cases, it is optimal for the monopolist to induce no changes in usage
across customers, while in others cases, network effects raise the usage of all market participants.
Optimal pricing is shown to include quantity discounts that increase with usage, and may also involve
a nonlinear two-part tariff. These results highlight the impact of network effects on trade-offs
between price discrimination and value creation, and have important managerial implications for
pricing policy in technology markets.
The need to deter competitive entry generally lowers profits for the monopolist, and increases
customer surplus. When network effects are homogeneous across customers, the resulting entry-deterring
monopoly contract is a fixed fee and results in the socially optimal outcome. However,
when the magnitude of heterogeneous network effects is relatively high, there are no changes in
total surplus induced by the entry threat, and the price changes merely cause a transfer of value
from the seller to its customers. The presence of network effects, and of a credible entry threat, are
also shown to increase distributional efficiency by reducing the disparity in relative value captured
by different customer types. Regulatory and policy implications of these results are discussed.Information Systems Working Papers Serie
Managing Digital Piracy: Pricing and Protection
This paper analyzes the optimal choice of pricing schedules and technological deterrence levels in a market
with digital piracy where sellers can influence the degree of piracy by implementing digital rights management
(DRM) systems. It is shown that a monopolist’s optimal pricing schedule can be characterized as a simple
combination of the zero-piracy pricing schedule and a piracy-indifferent pricing schedule that makes all customers
indifferent between legal usage and piracy. An increase in the quality of pirated goods, while lowering
prices and profits, increases total surplus by expanding both the fraction of legal users and the volume of legal
usage. In the absence of price discrimination, a seller’s optimal level of technology-based protection against
piracy is shown to be at the technologically maximal level, which maximizes the difference between the quality
of the legal and pirated goods. However, when a seller can price discriminate, its optimal choice is always a
strictly lower level of technology-based protection. These results are based on the following digital rights conjecture:
that granting digital rights increases the incidence of digital piracy, and that managing digital rights
therefore involves restricting the rights of usage that contribute to customer value. Moreover, if a digital rights
management system weakens over time due to the underlying technology being progressively hacked, a seller’s
optimal strategic response may involve either increasing or decreasing its level of technology-based protection.
This direction of change is related to whether the DRM technology implementing each marginal reduction in
piracy is increasingly less or more vulnerable to hacking. Pricing and technology choice guidelines are presented,
and some welfare implications are discussed.NYU, Stern School of Business, IOMS Department, Center for Digital Economy Researc
Nonlinear pricing and type-dependent network effects
This paper analyzes optimal monopoly pricing under incomplete information for a good that displays
positive network effects. In contrast with standard models of network effects (Katz and Shapiro, 1985),
the good modeled in this paper is consumed in variable quantities by heterogeneous customers, and the
magnitude of the network effects therefore depends on the total quantity consumed across customers,
rather than the total number of adopters. In addition, the value each customer gets on account of the
network effects depends on the customer’s individual consumption, as well as the customer’s type.
Examples of products that fit this description at least partially include corporate desktop software (where
customers are corporations of varying sizes, with varying intensity of software usage across employees)
and online trading services (such as those offered by eBay, where network effects increase with
increased trading volume).NYU, Stern School of Business, IOMS Department, Center for Digital Economy Researc
Managing Digital Piracy: Pricing, Protection and Welfare
This paper analyzes the optimal choice of pricing schedules and technological deterrence
levels in a market with digital piracy, when legal sellers can sometimes control the extent
of piracy by implementing digital rights management (DM) systems. It is shown that the seller's
optimal pricing schedule can be characterized as a simple combination of the zero-piracy pricing
schedule, and a piracy-indifferent pricing schedule which makes all customers indifferent between
legal consumption and piracy. An increase in the level of piracy is shown to lower prices and profits,
but may improve welfare by expanding the fraction of legal users and the volume of legal usage.
In the absence of price-discrimination, the optimal level of technology-based protection against
piracy is shown to be the technologically-maximal level, which maximizes the difference between
the quality of the legal and pirated goods. However, when a seller can price-discriminate, it is
always optimal for them to choose a strictly lower level of technology-based protection. Moreover,
if a DRM system weakens over time, due to its technology being progressively hacked, the optimal
strategic response may involve either increasing or decreasing the level of technology-based protection
and the corresponding prices. This direction of change is related to whether the technology
implementing each marginal reduction in piracy is increasingly less or more vulnerable to hacking.
Pricing and technology choice guidelines based on these results are presented, and some social
welfare issues are discussed.Information Systems Working Papers Serie
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