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Use of Pricing Schemes for Differentiating Information Goods

Merage School of Business, University of California, Irvine, Irvine, California 92697
veecee{at}uci.edu

Information goods vendors offer different pricing schemes such as per user pricing and site licensing. Why do competing sellers adopt different pricing schemes for the same information good? Pricing schemes affect buyers' usage levels and thus the revenue generated from different segments of buyers. This can allow competing firms in a duopoly to differentiate themselves by offering different pricing schemes. Such strategic use of pricing schemes can allow undifferentiated sellers to earn substantial profits in a friction-free market for a commoditized information good. These conditions would otherwise lead to the Bertrand equilibrium and zero profits. We show that adopting asymmetric pricing schemes can be a Nash equilibrium for information goods with negligible marginal cost of production. We extend our model to the case of information goods that are horizontally differentiated and show that sellers will offer a single-pricing scheme that is different from competitors when the sellers are weakly differentiated. When the sellers are strongly differentiated, each seller will offer multiple pricing schemes. We show that it can be optimal for a seller to offer multiple pricing schemes—metered and flat fee pricing schemes, even in the absence of transactions costs.

Key Words: duopoly; price competition; pricing; pricing schemes; information goods; differentiation
History: This paper was received on November 9, 2006.