SI 646 - Information Economics, Winter 2007

University of Michigan

2007-01

SI 646 - Information Economics, Winter 2007

MacKie-Mason, Jeffrey K. MacKie-Mason, J. K. (2007, April 19). Information Economics. Retrieved from Open.Michigan -

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Copyright © 2005-2007, Jeffrey K. MacKie-Mason.Copyright © 2005-2007, Jeffrey K. MacKie-Mason.

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Pricing informationPricing information

Jeff MacKie-MasonJeff MacKie-MasonSI 646SI 646

What factors affect price for a What factors affect price for a Tori Amos CD?Tori Amos CD?

Who is the problem solver (who Who is the problem solver (who sets the price)?sets the price)?

What does seller’s cost structure What does seller’s cost structure imply for price of a Tori CD?imply for price of a Tori CD?

What does competition imply for What does competition imply for price of Tori CD?price of Tori CD?

““Find a way to send a credible Find a way to send a credible signal that entry will be met with signal that entry will be met with aggressive pricing….One way to aggressive pricing….One way to establish this reputation, painful establish this reputation, painful though it may be in the short run, though it may be in the short run, is to fight tooth and nail when is to fight tooth and nail when faced with me-too entries for faced with me-too entries for specific information products.” specific information products.” (S&V p. 31)(S&V p. 31)Source: Shapiro, C. and H. Varian (1998). Information Rules (Harvard Business School Press). 31.Source: Shapiro, C. and H. Varian (1998). Information Rules (Harvard Business School Press). 31.

What does consumer demand (WTP) What does consumer demand (WTP) imply for pricing of Tori CD?imply for pricing of Tori CD?

Review: What is profit-maximizing Review: What is profit-maximizing rule for pricing?rule for pricing?

MR(p) = MC: What more do we MR(p) = MC: What more do we need to know?need to know?

Why do S&V write: "You must price Why do S&V write: "You must price your information goods according to your information goods according to consumer value, not according to consumer value, not according to your production cost“?your production cost“?

Source: Shapiro, C. and H. Varian (1998). Information Rules (Harvard Business School Press).Source: Shapiro, C. and H. Varian (1998). Information Rules (Harvard Business School Press).

Digression: What does this have to Digression: What does this have to do with non-profits?do with non-profits?

““Commentators marvel at the Commentators marvel at the amount of free information on the amount of free information on the Internet, but it’s not so surprising Internet, but it’s not so surprising to an economist. The generic to an economist. The generic information on the Net – information on the Net – information commodities such as information commodities such as phone numbers, news stories, stock phone numbers, news stories, stock prices, maps and directories – are prices, maps and directories – are simply selling at marginal cost: simply selling at marginal cost: zero.” (S&V p. 24)zero.” (S&V p. 24)Source: Shapiro, C. and H. Varian (1998). Information Rules (Harvard Business School Press). 24.Source: Shapiro, C. and H. Varian (1998). Information Rules (Harvard Business School Press). 24.

Nagle: Don’t think of consumer Nagle: Don’t think of consumer demand as fixed stone tablet demand as fixed stone tablet

Change demandChange demand

Segment demandSegment demand

Aggregate demandAggregate demand

Change demand: How?Change demand: How?

Increase itIncrease it

Make it less price responsiveMake it less price responsive

Segment demandSegment demand


Change demand: increase it.Change demand: increase it.How?How?

Change demand: Make it less price Change demand: Make it less price responsive.responsive.

How?How?

Both: Improve buyer information.Both: Improve buyer information.How?How?

Change demand: Worsen buyer Change demand: Worsen buyer information!information!

How?How?

Why?Why?

Nelson, Darby & Karni on goods Nelson, Darby & Karni on goods attributesattributes

Cost of info acquisitionCost of info acquisition

SearchSearch ExperienceExperience CredenceCredence

Info transparencyInfo transparency


Tailor pricing to Tailor pricing to distinguishable groupsdistinguishable groups

Segment demand: How?Segment demand: How?


Simple illustrationSimple illustrationSuppose two customers each want one unit, different Suppose two customers each want one unit, different willingness to pay willingness to pay (blue bars)(blue bars)Can price high to one (a), or price low to both (b)Can price high to one (a), or price low to both (b)If could price differentiate, could increase profit (c)If could price differentiate, could increase profit (c)

wtpwtp(a) Price high

consumersconsumers

pp

wtpwtp(b) Price low

consumersconsumers

pp

wtpwtp(c) Price discrim

consumersconsumers

pp11

pp22

Is segmenting easy?Is segmenting easy?Need segments distinguishableNeed segments distinguishable

and price distinctions enforceableand price distinctions enforceable

What three broad types of price What three broad types of price differentiation do S&V discuss?differentiation do S&V discuss?

personal pricing: based on some personal pricing: based on some indicator of individual WTPindicator of individual WTP


versioning: product line versioning: product line or quantity variationor quantity variation


group pricing: based on observable group pricing: based on observable group characteristics that predict group characteristics that predict

average WTPaverage WTP

How much to charge each How much to charge each group?group?

||

1)('

)(')(')(

)(')()('

0)(')()(':

)()(

Dp

qqp

p

MCp

qqpqCqp

qCqpqqp

qCqpqqpq

FOC

qCqqpMax

ε

π

π

=−=−−=−

=+

=−+=∂∂

+=

Inverse elasticity ruleInverse elasticity rule

What information is needed for What information is needed for each type of price differentiation?each type of price differentiation?

Personalized: Identify Personalized: Identify individuals and their wtpindividuals and their wtp


Versioning: Know predictable Versioning: Know predictable relationship between versions and relationship between versions and

distribution of wtp across consumersdistribution of wtp across consumers


Group: Know predictable relationship Group: Know predictable relationship between observable groups and between observable groups and

group demand elasticitiesgroup demand elasticities

Why doesn’t Apple charge lower Why doesn’t Apple charge lower iTunes price to senior citizens?iTunes price to senior citizens?

What are some examples of price What are some examples of price differentiation by versioning?differentiation by versioning?

What are some examples of price What are some examples of price differentiation by group?differentiation by group?


BundlingBundling

TyingTying


Aggregate demand: How?Aggregate demand: How?

What is bundling?What is bundling?

What is tying?What is tying?

How does tying affect demand?How does tying affect demand?

How does bundling affect How does bundling affect demand?demand?

Source: http://www.lib.umich.edu/retired/peak/

What are the fixed and variable What are the fixed and variable costs of publishing?costs of publishing?

What implications do these costs What implications do these costs have for journal pricing?have for journal pricing?

What are some price configurations What are some price configurations to consider for scholarly publishing?to consider for scholarly publishing?

What implications for competition?What implications for competition?

Really? Low prices?Really? Low prices?

SI 646 - Information Economics, Winter 2007

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