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Pricing and Price Discrimination

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

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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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