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

Sridhar Balasubramanian (), Shantanu Bhattacharya () and Vish V. Krishnan ()
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Sridhar Balasubramanian: Marketing Area, Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27599
Shantanu Bhattacharya: Singapore Management University, LKCSB, Singapore 178899
Vish V. Krishnan: Innovation, Technology, and Operations Area, Rady School of Management, University of California at San Diego, La Jolla, California 92093

Marketing Science, 2015, vol. 34, issue 2, 218-234

Abstract: 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-per-use 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.

Keywords: information goods; competitive strategy; pricing; digital marketing; game theory (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (30)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:34:y:2015:i:2:p:218-234

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