Nonlinear Pricing of Information Goods

This paper analyzes optimal pricing for information goods underincomplete information, when both unlimited-usage (fixed-fee) pricingand usage-based pricing are feasible and administering usage-basedpricing may involve transaction costs. It is shown that offeringfixed-fee pricing in addition to a nonlinear usagebased pricing schemeis always profit improving in the presence of nonzero transaction costs,and there may be markets in which a pure fixed-fee is optimal. Thisimplies that the optimal pricing strategy for information goods isalmost never fully revealing. Moreover, it is proved that the optimalusage-based pricing schedule is independent of the value of the fixedfee, a result that simplifies the simultaneous design of pricingschedules considerably and provides a simple procedure for determiningthe optimal combination of fixed-fee and nonlinear usage-based pricing.The introduction of fixed-fee pricing is shown to increase both consumersurplus and total surplus. The differential effects of setup costs,fixed transaction costs, and variable transaction costs on pricingpolicy are described. These results suggest a number of managerialguidelines for designing pricing schedules. For instance, in nascentinformation markets, firms may profit from low fixed-fee penetrationpricing, but as these markets mature, the optimal pricing mix shouldexpand to include a wider range of usage-based pricing options. Minimumfees, quantity discounts, and adoption levels across the differentpricing schemes are characterized, strategic pricing responses tochanges in market characteristics are described, and the implications ofthe paper’s results for bundling and vertical differentiation ofinformation goods are discussed.