Pricing Digital Goods: Discontinuous Costs and Shared Infrastructure

2011 | Information Systems Research | Citations: 0

Authors: Ke-Wei Huang; Sundararajan, Arun

Abstract: In this paper, we analyze a model of usage pricing for digital products with dis ... Expand

Abstract: In this paper, we analyze a model of usage pricing for digital products with discontinuous supply functions. This model characterizes a number of information technology-based products and services for which variable increases in demand are fulfilled by the addition of blocks of computing or network infrastructure. Such goods are often modeled as information goods with zero variable costs; in fact, the actual cost structure resembles a mixture of zero marginal costs and positive periodic fixed costs. This paper discusses the properties of a general solution for the optimal nonlinear pricing of such digital goods. We show that the discontinuous cost structure can be accrued as a virtual constant variable cost. This paper applies the general solution to solve two related extensions by first investigating the optimal technology capacity planning when the cost function is both discontinuous and declining over time, and then characterizing the optimal costing for the discontinuous supply when it is shared by several business profit centers. Our findings suggest that the widely adopted full cost recovery policies are typically suboptimal. Collapse

Topics: price management nonlinear pricing digital good advertising management information technology infrastructure

Methods: optimization model literature study

When Truces Collapse: A Longitudinal Study of Price-Adjustment Routines

2010 | Organization Science | Citations: 0

Authors: Zbaracki, Mark J.; Bergen, Mark

Abstract: We analyze the microfoundations of the routine in a study of price-adjustment pr ... Expand

Abstract: We analyze the microfoundations of the routine in a study of price-adjustment processes at a manufacturing firm. Existing theory says that truces balance cognitive and motivational differences across functions, but there is scant evidence on how truces work. We show both stability and change in routines. For minor price adjustments, routines incorporate truces in stable but separate market interpretations by the sales and marketing groups. Major price changes put truces at risk, as latent conflict over information and interests becomes overt. The ensuing battle shows how interests, information, and truces are intertwined in performing the routine. Routines are not just stable entities, but adaptive performances that include conflict. We illustrate how our approach addresses fundamental problems such as how firms perform economics, how routines incorporate economic theory, and how routines shape macroeconomic dynamics. We argue that our approach can be extended to any routine-based organizational work. Collapse

Topics: price management marketing management knowledge representation electronic mail decision making

Methods: qualitative interview ontological modelling grounded theory ethnography business process modeling

Theories: economic theory transaction cost economics evolutionary theory organizational theory behavioral theory of the firm

Pricing Strategy and Resource Management in the Digital Era

2003 | Americas Conference on Information Systems | Citations: 0

Authors: Sun, Daewon

Abstract: IntroductionModern information technologies have caused changes in business pra ... Expand

Abstract: IntroductionModern information technologies have caused changes in business practice and hold continued prospects for new innovations. Increased information visibility, and increased ability for two-way multimedia communication between remote entities, makes it possible for firms to experiment with new business models, pricing strategies and resource allocations. This raises a need for formal model-based analysis of new opportunities and new decision problems. The complex nature of such problems makes it essential to development management decision technologies that supplement the model-based decision analysis and provide managers with interactive tools for studying the consequences of new pricing and resource allocation strategies. My dissertation research develops on this theme, by developing mathematical models for analyzing business practices in two specific areas (electronic retailing and broadband internet access services) and by developing decision support systems that enable the deployment and use of these models to improve managerial decisions.My first essay studies stockout compensation policies for an electronic retailer where the retailer could offer a price discount to compensate for product unavailability during stockout. The electronic retailing context makes it easier to implement the stockout compensation policy, since short-lived price changes (or compensations) can be announced quite costelessly due to lower menu costs. The key finding is that it is optimal for the retailer to set a compensation equal to the expected waiting cost, and I show that the stockout compensation policy results in more efficient operation (it reduces inventory costs and increase market coverage, consumer surplus, and social welfare) as well as increases the retailer's profit.The second essay develops analytical models and decision support techniques to examine another new business practice, dual mechanism, where an online retailer combines two commonly used selling mechanisms (posted-price and auction). I find that this business practice implements a price discrimination model based on customer's delay sensitivity. Through systematic computational experiments, I demonstrate that the dual mechanism strictly dominates the posted-price mechanism, but that the pure auction mechanism could outperform the dual mechanism.The third identifies new possibilities for marketing of broadband services and analyzes firm and consumer behavior in the context of multiple classes of services. This essay proposes a definition of QoS in a broadband network, presents a measurement of the proposed QoS, and discuss its implementability. I am currently attempting to examine how the idea of contingency pricing can be applied meaningfully to broadband services to assure customers for high quality services.The rest of this extended abstract is organized as follows. Section 2 describes my second essay in terms of motivation, problem statement, computational experiments, and DSS model. Section 3 motivates the problem of my third paper, presents preliminary results, and discusses implementability of my proposal. MotivationWhile posted price and auction-based pricing mechanisms have typically been seen as alternatives, the simultaneous use of these mechanisms (by a single firm and for the same product) has grown with the commercialization and widespread use of the Internet. Internet-based pricing technologies give firms a fairly low-cost means to provide and to customize information about prices and related factors, such as delivery times. In some cases, the seller uses the two mechanisms jointly but only to move two separate Sun/Pricing Strategy and Resource Management 2003 -Ninth Americas Conference on Information Systems 3403classes of goods (e.g., in-fashion clothing vs. out-of-style clothing), which is easily explained as a case of quality-based price discrimination. Our focus of this paper is on examining a new selling mechanism, which hereafter we call the Dual Mechanism, on the current Internet: the simultaneous use of a posted pricing scheme with immediate delivery and a multi-unit auction with delivery delayed to the end of the auction. Examples of such practice include Dell Computer and IBM, both manufacturers and direct sellers of computer equipment, and uBid, which is an online reseller. In addition to these large firms, there are many relatively small online retailers on eBay.com who offer a posted price market with immediate delivery and a simultaneous multiunit auction.Why would such a Dual Mechanism make sense? Since buyers have the option of purchasing at the posted price, why would any rational buyer ever bid greater in the auction, especially given the delayed delivery? Given this fact, why would the firm have any incentive to sell some units of the product through an auction at a lower price? The purpose of this paper is to explain how this Dual Mechanism affects the complex interplay that the seller faces between revenues and costs. The intuition is that when buyers have time-or delay-sensitive valuations, then the simultaneous offering of these two mechanisms can help the firm exploit heterogeneity in delay sensitivities and separate high-type and low-type buyers.Moreover, the distinctive aspect of our analysis is that we take into account the cost, specifically the inventory structure, of the seller's operations. The seller holds enough inventory to satisfy only high-type buyers, while it fulfills the demand of low-type buyers without incurring holding costs. Problem Statement and FormulationWe consider an online retailer who sells a product through a web store and manages inventory using an EOQ-type policy. We assume that customers arrive at the web store at a constant rate, d, at each period and that the customer valuations for the product are uniformly distributed between 0 and 1 (i.e., ). We also assume that a customer's valuation decreases, due to the ] , V~U[ 1 0 waiting time for the product, until she receives it. We model this disutility as a linear function of the customer's valuation and waiting time. Specifically, if a customer with valuation v gets the product after t periods, then the customer's utility is v(1-wt) where w (0<w<1) is a constant representing delay sensitivity.For simplicity, we assume that the lead time between order placement and order arrival is deterministic and that the customers get the product immediately after the retailer ships the product. Without loss of generality, we assume that the retailer delivers the ordered products immediately for the posted price customers, but fulfills the auction winners' delivery at the closing time of the auction. The retailer can purchase the product at unit purchasing cost, c. The inventory costs include an ordering cost, A, per order and a unit holding cost, h, per period. The retailer's objective is maximizing the expected profit per unit time by simultaneously deciding cycle length (T), posted price (p p ), and number of units for the auction (N).Through our analysis, we have found that, under the Dual Mechanism, there exists an indifference point at each period and that the customers choose either the posted price or auction by comparing this indifference point with their valuation for the product. We omit the details of these results due to the space limit. Collapse

Topics: electronic commerce internet technology price management decision support system IS economics

Methods: experiment mathematical model sensitivity analysis computational algorithm economic model