Price Discrimination for Information Goods

This week’s theme is all about information goods. Mainly in terms of costs, competition and strategies, market structures, and pricing, the reader provides us with a lot of information on this subject. In one of the articles (Chapter 2: Pricing Information), the authors (Shaprio and Van Varian) argue that the Internet has made it easy to personalize information products. In addition, the Internet also makes it easy for companies to personalize the price they are charging for their information products. Furthermore, they argue that information products that are highly tuned to customers’ interests will have a lot of pricing flexibility. By using a so-called “point-to-point” technology, organizations should be able to arrange for multiple, and even personalized, prices. In the same chapter, the authors refer to Pigou, an economist who already in 1920 referred to the “one-to-one marketing” strategy by the phrase “first-degree price discriminiation”. What follows is a discussion on three types of differential pricing, which are called first, second, and third degree price discrimination (Pigou, 1920). The authors continue by giving them more descriptive terms and a discussion on the first and third one.The second degree of price discrimination is described in the third chapter, which is not in our reader.

In order to get a full and, hopefully, better understanding of all three degrees, I found a really interesting article on the latter one with regard to information goods! In his article, Frank Linde (2009) not only describes the second degree of price discrimination, but argues that information goods allow for new forms of second degree price discrimination. That’s why I thougt it would be interesting enough for us all to get notified! What follows is a short discussion on his findings.

Linde (2009) starts with pointing out three different basic forms of price discrimination. As I already mentioned, two – the first and third one – are also explored, and in more detail, in the reader, whereas Linde (2009) is focusing on the second one. The second degree of price discrimination is explained as a principle of self selection: customers choose from several alternatives according to their individual willingness to pay. Linde (2009) argues that three types of this degree of price discrimination can be distinguished, all based on the fact that the supplier does not make a fixed offer to different customer groups, but that the customer can choose which price to pay himself.

The first concept is called “windowing” and refers to bringing a finished information good like a film or book in different forms and at varying times on to the market. Because the offers satisfy different needs, customers are prepared to pay on different price levels. Providers of information are trying to create various “profit windows”, to tap the full potential and gain as much as possible. The second type is called “versioning”. With versioning, Linde (2009) argues that the organization offers its product in various versions and leaves it up to the customer to select the (most) suitable one. For information providers, it would be very easy to produce different or various versions. The cost of changing the original version would be very low in comparison with, for example, the development costs. The last concept is called bundling, which means coupling two or more goods in order to get a combination that creates a single offer. The latter one is sold as a package or set for an all round price. Linde (2009) argues that bundling would be a worthwile variant of price discrimination, as the marginal costs of for the addition of further goods to a bundle are of neglectible value. 

Based on Linde’s (2009) theoretical framework, I conclude that the three various types of second degree of price discrimination can be applied very well to information goods. I think this article is really an interesting one, in terms of being complementary to the reader. By reading it you’ll get a better understanding of information goods and the ways in which price discrimination is and can be implemented to this product category!

References:

Reader (Section 6): Pricing Information, Shaprio & Van Varian

Frank Linde, (2009),”Pricing information goods”, Journal of Product & Brand Management, Vol. 18 Iss: 5 pp.
379 – 384