Bundling Information Goods of Decreasing Value

Geng, Xianjun; Stinchcombe, Maxwell B.; Whinston, Andrew B.

doi:10.1287/mnsc.1040.0344

Cited by 137 publications

(113 citation statements)

References 7 publications

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“…There are two streams of bundle pricing literature. The first stream is from the strategic level to bundle a typical kind of products, for example, information product [10] and food product [11]. Managerial insights are provided from the strategic level.…”

Section: Literature Reviewmentioning

confidence: 99%

Bundle Pricing Decisions for Fresh Products with Quality Deterioration

Yan

Jiang

Han

2018

Journal of Food Quality

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How to sell fresh products quickly to decrease the storage cost and to meet customer quality requirement is of vital importance in the food supply chain. Bundling fresh products is an efficient strategy to promote sales and reduce storage pressure of retailers. In this paper, we consider the bundle pricing decisions for homogeneous fresh products with quality deterioration. The value of fresh products with quality deterioration is approximated as an exponential function based on which customer's reservation prices are calculated. A nonlinear mixed integer programming model is used to formulate the bundle pricing problem for fresh products. By adding auxiliary decision variables, this model is converted into a mixed integer linear program. Numerical experiments and sensitive analysis are conducted to provide managerial insights for bundling fresh products with quality deterioration.

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Section: Literature Reviewmentioning

confidence: 99%

Bundle Pricing Decisions for Fresh Products with Quality Deterioration

Yan

Jiang

Han

2018

Journal of Food Quality

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“…The latter assumption is for future analytical brevity, so that we do not have to analyze the seller using just one unit of supply as a special case. The cost function, illustrated in Figure 2.1, is therefore a step function with discontinuous increases at specific integer value of Q, and with potentially different jumps at each of these values 6 .…”

Section: Overview Of Modelmentioning

confidence: 99%

“…6 Often, there is a fixed cost F associated with setting up the ability to fulfill demand; equivalently, c(1) may be substantially higher than succeeding values of c(i). A generalization of our model that incorporates this kind of setup cost is straightforward.…”

Section: Overview Of Modelmentioning

confidence: 99%

“…This body of research has shown, among other things, that large-scale pure bundling can increase a monopolist's profits (Bakos and Brynjolfsson, 1999) so long as the value each customer places on different goods in the bundle does not vary too much (Geng, Stinchcombe and Whinston, 2005), that product versioning may not be an optimal pricing strategy (Bhargava and Choudhary, 2001), and that fixed-fee pricing can increase the profits from pure second-degree price discrimination (Sundararajan, 2004). Each of these papers assumes that digital goods are "information goods" with zero marginal costs, an aspect that distinguishes their analyses from ours, and also suggests a significant direction for future research.…”

Section: Introductionmentioning

confidence: 99%

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Pricing Digital Goods: Discontinuous Costs and Shared Infrastructure

Huang

Sundararajan

2011

Information Systems Research

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We develop and analyze a model of pricing for digital products with discontinuous supply functions. This 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. Examples include internet service, telephony, online trading, on-demand software, digital music, streamed video-on-demand and grid computing. These goods are often modeled as information goods with variable costs of zero, although their actual cost structure features a mixture of positive periodic fixed costs, and zero marginal costs. The pricing of such goods is further complicated by the fact that rapid advances in semiconductor and networking technology lead to sustained rapid declines in the cost of new infrastructure over time. Furthermore, this infrastructure is often shared across multiple goods and services in distinct markets.The main contribution of this paper is a general solution for the optimal nonlinear pricing of such digital goods and services. We show that this can be formulated as a finite series of more conventional constrained pricing problems. We then establish that the optimal nonlinear pricing schedule with discontinuous supply functions coincides with the solution to one specific constrained problem, reduce the former to a problem of identifying the optimal number of "blocks" of demand that the seller will fulfil under their optimal pricing schedule, and show how to identify this optimal number using a simple and intuitive rule (which is analogous to "balancing" the marginal revenue with average "marginal cost"). We discuss the extent to which using "information-goods" pricing schedules rather than those that are optimal reduce profits for sellers of digital goods. A first extension includes the rapidly declining infrastructure costs associated with Moore's Law to provide insight into the relationship between the magnitude of cost declines, infrastructure planning and pricing strategy. A second extension examines multi-market pricing of a set of digital goods and services whose supply is fulfilled by a shared infrastructure.Our paper provides a new pricing model which is widely applicable to IT, network and electronic commerce products. It also makes an independent contribution to the theory of second-degree price discrimination, by providing the first solution of monopoly screening when costs are discontinuous, and when costs incurred can only be associated with the total demand fulfilled, rather than demand from individual customers.

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“…Part (ii) indicates that when maximizing expected profits, uncertainty in W prompts the firm to use as decision- 9 Information goods are chosen here merely to keep analytical complexity as low as possible. Of course, there are settings for which the small, but nonzero, nature of the marginal costs matters, such as in deriving asymptotic properties of large bundles of information goods [3,13]. 10 This condition can also be written in terms of the r-norm of the row vector (α H , α V ), i.e.,…”

Section: Demand Estimationmentioning

confidence: 99%

Delayed multiattribute product differentiation

Weber

2008

Decision Support Systems

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We develop a two-stage model for versioning products with respect to both vertical and horizontal attributes. At first, a firm positions its top-quality "flagship" product in a market with an imperfectly known distribution of tastes and reservation prices. In the second stage, the firm learns these consumer characteristics and has the option of extending its product line by versioning the flagship product using pure horizontal differentiation, quality degrading, or both. The firm's nonconvex versioning problem is solved analytically for the two-product case. We find that ex ante extending the product line through vertical differentiation is optimal for low marginal cost of quality (development cost); otherwise pure horizontal differentiation is superior. Given quasilinear consumer preferences and a uniform distribution of consumer characteristics, versioning with respect to both horizontal and vertical attributes is never optimal. Under delayed differentiation the optimal policy is contingent on the observed demand realization and may lead to horizontal cannibalization and price dispersion for equal-quality products. The firm tends to increase its investment in product quality unless it adopts a state-contingent policy of horizontal versioning for high and vertical versioning for low demand realizations. Following a state-contingent policy, the optimal upfront development effort may be significantly lower than under full ex-ante commitment. The option value of delayed differentiation is generally nonmonotonic in the firm's development cost.

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Bundling Information Goods of Decreasing Value

Cited by 137 publications

References 7 publications

Bundle Pricing Decisions for Fresh Products with Quality Deterioration

Bundle Pricing Decisions for Fresh Products with Quality Deterioration

Pricing Digital Goods: Discontinuous Costs and Shared Infrastructure

Delayed multiattribute product differentiation

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