Transcript Pricing Information

Information Rules:
A Strategic Guide to the Network Economy
Pricing Information
Carl Shapiro
Hal R. Varian
modified from the original by J Smith & M Klein
Information Is A Commodity
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Subject to market conditions
Usually has high creation costs
Benefits from low marginal costs
Threatened by further commoditization
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Information Is A Commodity
• Subject to market conditions
Examples --News & Journals (free vs paid vs registration-required)
Manuals, repair guides, how-to books
Recipes/cookbooks
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Britannica v. Encarta
• Britannica: 200 years, $1,600 for set
• 1992: Microsoft purchased Funk &
Wagnalls to make Encarta
• Britannica response
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Online subscription at $2,000 per year
Sales dropped 50% between 1990 and 1996
Online subscription at $120
CD for $200, since 1996 $70-$125
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Information Is A Commodity
• Subject to market conditions
• Usually has high creation costs
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Production (Creation) Costs
• First-copy – i.e., creation - costs dominate
– Sunk costs - not recoverable
Examples –
– Traditional business examples
• Property
• Movie Script
– Information business examples
• Interactive DVDs (including educational and gaming)
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Production (Creation) Costs
• First-copy – i.e., creation - costs dominate
– Sunk costs - not recoverable
True, but sometimes they’re very low
Information business example
• Million Dollar Home Page
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Information Is A Commodity
• Subject to market conditions
• Usually has high creation costs
• Benefits from low marginal costs
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Marginal (Reproduction) Costs
• Variable costs small; no capacity constraints
– Microsoft has 92% profit margins
– Million Dollar Home Page costs = $50/year?
• Significant economies of scale
– Marginal cost less than average cost
– Declining average cost
– Click-&-Mortar is cheaper than Brick-&-Mortar
so it impacts traditional business too
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Information Is A Commodity
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Subject to market conditions
Usually has high creation costs
Benefits from low marginal costs
Threatened by further commoditization
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Commoditized Information Example
• CD ROM phonebooks
• 1986: Nynex charged $10,000 per disk for NY
directory
• ProCD and Digital Directory Assistance
• Chinese workers at $3.50 daily wage
• Bertrand competition
– Start at $200 each
– Price forced to marginal cost
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Implications for Market Structure
• Cannot be "perfectly competitive"
• Examples of the 2 sustainable structures
– Dominant firm/monopoly
• AOL/Time-Warner
– Differentiated product
• Ask Jeeves
• …and combinations of above
• Google
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If You are in
Commodity Business
• Cost leadership
• Sell the same thing over again
– Baywatch, Reuters
– Reduces average cost
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Differentiate Product
• Bigbook and maps (digitized yellow pages)
• West Publishing and page numbers
• Copyright and content
What about more current examples?
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First-mover Advantages
• Avoid greed
– Respond to threat quickly and decisively
– Limit pricing; highly credible with high FCs
• Play tough
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Discourage future entry
Protects expression, not ideas
Imitation as a strategy
Constant innovation (search engines)
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Hard to do for Incumbent
• May not recognize threat till too late
– CP/M – Commodore/Atari/Amiga/etc.
– Wordstar -- WordPerfect
– VisiCalc – Lotus 1-2-3
What about more current examples?
– Alta Vista?
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Personalize Your Product
• Personalize product, personalize price
– My Yahoo!, My eBay
– Priceline (airline tickets)
• Hot words (in cents/view)
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Deja News:
Excite:
Infoseek:
Yahoo:
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4.0
4.0
5.0
3.0
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Know Your Customer
• Registration
– Required: NY Times
– Billing: Wall Street Journal
– AOL’s ace in hole: ZAG
• Know your consumer
– Observe Queries
– Observe Clickstream
– Conduct Usability Tests (eye-tracking, e.g.)
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Logic of Pricing
• Quicken example
– 1 million wtp $60, 2 million wtp $20?
– Demand curve (next slide)
– Assumes only one price
• Price discrimination gives $10 million
– Problems
• How do you know wtp?
• How do you prevent arbitrage?
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Demand Curve
Price
(Dollars)
$60
$4
0
$20
1
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Quantity (Millions)
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Forms of Differential Pricing
• Personalized pricing
– Sell to each user at a different price
Ex: priceline, ebay, google adwords
– Can exert both a downward and upward pressure on price
• Versioning
– Offer a product line and let users choose
Ex: Adobe Photoshop
– Discussed in detail in a later chapter
• Group pricing
– Based on group membership/identity
Ex: Student discounts on popular software (studica.com)
– Subject to price sensitivity, network effects, lock-in & sharing
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Discussion Question
• How have search engines impacted the
price of information?
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Discussion Question
• How have search engines impacted the
price of information?
• Google adwords & auctions
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Price Sensitivity & The Internet
• International pricing
• US edition textbook: $70 vs Indian edition: $5
• Pharmaceuticals: US vs Canada
• Auctions
• Price pressures –
– Price forced steeply higher
– Price forced significantly lower
• Product Search Engines
• Froogle
• Hot Deals
• Price Grabber
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The Future of Information Costs
• What will impact future information costs?
• Will information become cheaper or costlier?
– Can information become “priceless” in the way that
more tangible assets do (“Liberty Bell”)?
• Who will pay [most] for information?
– Individual seeking privacy?
– Government seeking transparency?
– Industry seeking profits?
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Summary
• Understand cost structure
• Commodity market: be aggressive, not
greedy
• Differentiate product and price
• Understand consumer
• Personalize products and prices
• Consider selling to groups
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END
Thanks!
Martin & Joan
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