Use of Pricing Schemes for Differentiating Information Goods

Information goods vendors offer many different pricing schemes such as per user pricing, site licensing, etc. Why do some firms such as Microsoft offer multiple pricing schemes while others such as Apple’s iTunes and Salesforce.com limit themselves to a single pricing scheme? Why do competing sellers adopt different pricing schemes for the same information good? We show that pricing schemes affect buyers’ usage levels and thus the revenue generated from them. This is reflected in differences in buyers’ demand elasticity under different pricing schemes. We propose and formalize a concept we call Congruousness to measure the level of fit between pricing schemes and buyer segments. We show that firms can use pricing schemes with different congruousness to differentiate themselves from competing firms in a friction-free market for a commoditized information good. Under conditions that are known to result in the Bertrand equilibrium, we show that an undifferentiated duopoly of sellers can earn substantial profits by using different pricing schemes in a strategic manner. Contrary to prior literature, we show that the strategy of adopting asymmetric pricing schemes can be a Nash equilibrium for information goods with negligible marginal costs 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 its competitor 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. Acknowledgements: I would like to thank Hemant Bhargava, Sanjeev Dewan, Barrie Nault, Rajeev Tyagi, participants at WISE 2004, WISE 2005, and seminar participants at Hong Kong University of Science and Technology, University of Calgary, University of California, Davis and the University of Texas at Austin for valuable feedback and comments. This research has been supported by grants from the CISE/IIS/CSS Division of the U.S. National Science Foundation and the NSF Industry/University Cooperative Research Center (CISE/EEC) to the Center for Research on Information Technology and Organizations (CRITO) at the University of California, Irvine. Industry sponsors include: the Boeing Company, IBM, IDC, Intel, Microsoft, and the U.S. Department of Defense. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of the National Science Foundation. Email: [email protected]. Postal: Merage School of Business, University of California, Irvine, Irvine, CA 92697