SF-Med-School

8/14/2019 SF-Med-School

1/4

Pricing Information Goods CopyrightHal R. Varian 1996Page 1

Pricing Information Goods

Hal R. Varian

School of Information Management and Systems

UC Berkeley

slides available at

http://www.sims.berkeley.edu/~hal


costly toproduce

cheap to reproduce

cost of selling x copies = cx + F

c is very small

F is very large

possible objectives for pricing:cost recovery

profit maximization

Information goods


Person A: willing to pay $5 for book

Person B: willing to pay $3 for book

cost of book = $7 fixed cost, 0 variable cost

Example 1


Example 1: A wtp $5, B wtp $3, total cost=$7

efficient to produce book (benefits - costs) cant recover costs at any uniform price

can recover costs with price differentiation

Observations about example 1


2/4


A wtp $8, B wtp $3, total cost=$7

welfare max => A and B both get books

uniform price + cost recovery =>

only A gets book

price discrimination => both get books

Example 2


A wtp $20, B wtp $8, total cost=$7

uniform price + profit max =>

only A gets book

even though B is wtp total cost of production!

price discrimination =>

both get books

Example 3


Generally want to have price discrimination

for profit maximization

for cost recoveryMaximizes access

Conclusions


Easy case: group pricing

library and individual rates

profit and nonprofit ratesHard case: self-selection

choose characteristics of product to induce selection

Examples

airplane pricing: Saturday night stayover

delay: stock prices

resolution: stock photos

Problem with PD


3/4


Books

hardbound, library, paperback, remaindered

Journals

individual, library, profit, non-profit rates

Film

first-run, hotels & airplanes, video

video: purchase and rental pricing

Differential pricing


American Economic Review

23,000 member subscriptions, 2,000 libraries

how to price electronic version?

Worry: library subscription may be too convenient

on-site use only

delay

professional version

hypertext linkscurrent awareness

more powerful search engine

Academic journals


Sell packages of goods bundled together

Microsoft Office Suite

journals = bundle of articlessubscription = bundle of journals

bundling journals by subject matter

Cost reasons to bundle

many go away with electronic delivery

Marketing reasons to bundle

are amplified for electronic delivery

Bundling


Professor A

will pay $120 for Journal of Addition

will pay $100 forJournal of SubtractionProfessor B

will pay $100 forJournal of Addition

will pay $120 forJournal of Subtraction

Publisher

sells journals separately gets $400

sells bundle gets $440

Rationale for bundling


4/4


Willingness to pay for journal depends on how many otherpeople read it.

Example of network externality

fax

email

mass market software

electronic journals?

Critical mass leads to explosive growth

Network externalities


Fair use: right to copy subset of content

Cryptographic envelopes: enforce T&C

Price should reflect terms and conditions

liberal terms-> higher price, less sold

conservative terms->low price, more sold

pick T&C to maximize value of IP, not max protection

Examples

library historyvideo history

journals (American Geophysical Union v Texaco)

Terms and conditions


Expect to see:

different prices for different users and uses

quality differentials to support self selection bundling to support cost recovery

explosive growth after critical mass achieved

experimentation with pricing and terms & conditions

Conclusions

Documents

SF-Med-School