Oz Shy on #pricediscrimination in information goods

cinema de Brouckère 915

Oz Shy, The economics of network industries (2001):

Pricing Information Goods

Information goods are characterized by having a large fixed and sunk “production” cost, and a relatively low… marginal cost since the cost of reproducing and distributing an additional copy is negligible… This implies that cost-based pricing makes little sense [to whom?] and value-based pricing is much more appropriate. 

A firm selling a unique type of information that it monopolizes by copyright protection can utilize several strategies to extract large amounts of surplus from consumers… All these strategies have one thing in common, which is causing consumers to sort themselves into different groups according to their willingness to pay. These strategies are highly profitable whenever consumers have radically different values for a particular information good, so techniques for differential pricing become very important. 

Information release delay: 

Selling the information with no delay to those consumers who are willing to pay the most and delaying the sale for consumers with low willingness to pay. 

Popular books are sold initially in hard covers; several months later they are released in paperbacks editions. Movies are released for the big screens in the first year, and only later they are distributed on prerecorded video cassettes. [Things have moved on.]…

Time-delay market segmentation is not unique to information goods. It also common to delivery systems. For example, Federal Express commits to next-day delivery of a package for a price of about $12, and for a morning delivery for about $22. What consumers do not know is that both types of deliveries arrive to the destination cities on the same plane and therefore at the same time. In many cases, Federal Express makes a special afternoon trip to the same neighborhood that was visited in the morning solely for the purpose of maintaining the market for consumers with low-willingness to pay. 

Quality discrimination:

Selling a full-scale version with all the bells-and-whistles bundled with a fast service to consumers with a high willingness to pay, and a version with reduced features to consumers with low willingness to pay… 

Upgrades and new editions: 

Periodically, releasing improved versions [for example, of textbooks] with more features and selling them to the consumers with high willingness to pay, and selling outdated version to consumers with low willingness to pay… 

Renting versus selling: 

 

Bundling: 

Bundling can work only if consumers have different tastes for different features of the information product. Bundling involves creating information products with features that are highly valuable for one group of consumers and is less valuable for second group and features that are highly valuable for the second group of consumers and less valuable for the first group of consumers. [e.g. cable TV]

Published by

Paul Hodson

Head of Unit "EnergyEfficiency" at European Commission, Directorate-General for Energy

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