Download Strategic Price Discrimination of Information Goods

Strategic Price Discrimination of Information Goods
over Different Consumer Groups
Yong Y. Sohn
(Department of Economics, Chonnam National University
300 Yongbong-Dong, Buk-Gu, Gwangju 500-757, South Korea
Email: [email protected])
JEL- code: L11, L86
Key words: information goods, introductory pricing, incentive-compatible contracts
Abstact
Among many kinds of price discrimination found in information goods markets, this
paper is focused on the seemingly contradictory pricing strategy of a monopolist to the
size of customers. A monopolist producing a software product would like to takes a
volume discount to a group customer such as a business firm. But it is also found that a
monopolists sometimes charges a higher price to a group customer, taking advantage of
lower elasticity of demand of an aggregate group and its higher willingness to pay from
the network effects occurring among users in the group.
Supposed that there are two kinds of customers, individual customers and a group of
customers, and that an information good sold by a monopolist has a characteristic of
network effect, we derive incentive-compatible contracts of the monopolist not knowing
the actual types of customers except for their distribution. It is shown that the optimal
incentive-compatible contracts are strongly dependent on the distribution of the
customer types, the relative size of the group customers, and on the strength of the
network effects of the good. When customers in a group are homogeneous and different
from individual customers in terms of their types, it is fairly easy for the firm charge
proper price. But with uniformly distributed customers regardless of making a group,
pricing depends on the sizes of network effects and management costs of using
computers and communication technologies. And it is generally true that the optimal
price to a group customer is proved to be lower than that to an individual customer
when the good is in the introductory stage to the market.