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Pricing and Price Discrimination

This lecture explores the dynamics of pricing in the information economy, focusing on cost structures such as first copy costs versus marginal costs of reproduction. It examines the implications of price competition among firms offering similar data, using examples from traditional and digital information providers like Encyclopedia Britannica and online platforms. Key strategies for success in the information market include limit pricing, understanding customer data, and personalized pricing models. The discussion also touches on ethical considerations surrounding price discrimination and the impact on various customer demographics.

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Pricing and Price Discrimination

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  1. Pricing and Price Discrimination Scott Tower Lecture 4 January 15, 2002

  2. Cost of Producing Information • First copy costs • Expensive to gather data for the first edition but further printing costs are virtually non-existent • Information can become a commodity • When firms offer the same data, they can only compete on price – death spiral • Phone book • Britannica vs. Encarta • Method of delivery is proving to be more important than the quality of data

  3. Cost of Producing Info. – Questions • Do you think the traditional print dictionary will eventually be phased out? • What types of information providers will be able to survive in our new economy?

  4. How These Information Firms Can Succeed • Limit pricing • Set prices low enough to keep competitors at bay • Cost leadership • Don’t cut corners, cut costs • Decrease price and increase volume • Dell • First mover advantage • Allow people to become familiar with interface, etc. so their personal switching costs increase • Napster

  5. Success of Info. Firms - Questions • Barring any legal issues, will Morpheus survive? • Give me an example of a time when first mover has been a disadvantage?

  6. Knowing Your Customer • The more you know, the better you can forecast • How you can collect data • Registration and billing • Clickstream • What you can do with the data • Offer more appropriate line of products • Price more effectively • Dell help line

  7. Personalized Pricing • Different people receive different prices • Airlines determine your price sensitivity based on advance purchase and duration of travel • Amazon.com and Victoria’s Secret experimented with charging different prices based on zip code • Price of excess inventory can be decreases immediately on the Internet • www.lastminute.com • eBay

  8. Price Discrimination Comparison

  9. Version Pricing • Common in offline world • BMW has 3, 5, 7, M, Z, and X series for cars • Similar for domain name registration • Register.com has multiple tiers of service depending on what the end user wants

  10. Group Pricing • Price sensitivity • Senior citizens and students • Lock-in • Grab customers early and help them feel comfortable with your product • WSJ is doing this with us right now • Sharing arrangements • Libraries pay more for journals than individuals

  11. Opportunities and Challenges • Level the playing field • The study, called "Consumer Information and Price Discrimination ," found that minorities pay an average of 2 percent more than whites when buying a vehicle, a figure that works out to about $500 per sale and includes differences in the purchase prices as well as the costs of the new-car hunt. - www.newsbytes.com • Falsifying information • Received a subscription to Wired magazine for free by misrepresenting myself

  12. Pricing You Product - Questions • Is there any way that firms can ensure that people are being honest (entering accurate information) online? • How can firms defend against arbitrage? • Do you think price discrimination is ethical?

  13. Questions?

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