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Mar 20, 2015

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

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.

Citation

Balasubramanian, S., Bhattacharya, S., & Krishnan, V. (2015). Pricing information goods: A strategic analysis of the selling and pay-per-use mechanisms. Marketing Science, 34(2), 218-234. 10.1287/mksc.2014.0894


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