1 / 26

Pricing Information

Hal R. Varian. Pricing Information. Britannica v. Encarta. Britannica : 200 years, $1,600 for set 1992: Microsoft purchased Funk & Wagnalls to create Encarta Britannica response Sales dropped 50% between 1990 and 1996 Online subscription at $120 CD first for $200, then $70-$125

dianne
Download Presentation

Pricing Information

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Hal R. Varian Pricing Information SIMS

  2. SIMS Britannica v. Encarta • Britannica: 200 years, $1,600 for set • 1992: Microsoft purchased Funk & Wagnalls to create Encarta • Britannica response • Sales dropped 50% between 1990 and 1996 • Online subscription at $120 • CD first for $200, then $70-$125 • Free access, Summer 1999 • Offer subscriptions to libraries • Adopt Wikipedia model

  3. SIMS Wikipedia v Encarta • Wiki – developed by Ward Cunningham circa 1994-95 • Wikipedia started 2001 by Larry Sanger and Jimmy Wales • Currently 2.7 million articles (in English)‏ • 256 other languages, 21 with more than 50 thousand articles • Microsoft’s response: “looking for volunteers to keep Encarta up to date.” • "Microsoft offers cash" • "Paid entries in Wikipedia?“

  4. SIMS Production Costs of Information • First-copy (fixed) costs dominate • Sunk costs: not recoverable • Variable costs small; no capacity constraints • Microsoft profit margins of 92% • Leads to significant supply-side economies of scale and scope

  5. SIMS Economies of Scale and Scope • Traditional supply-side economies (cost effects)‏ • Economies of scale • cost of incremental units less than average cost • equivalently: average cost is declining in units produced • often due to fixed costs • Economies of scope • cost of producing additional products reduced • often due shared resource • E.g., Google infrastructure allows them to offer additional services at relatively low cost (e.g., Google Scholar)‏

  6. SIMS Economies of Scale and Scope • Demand side (revenue effects)‏ • Economies of scale • value of product increases with number of users • often due to network externalities • Economies of scope • value of product depends on availability of other products • systems effects: DVD player + disk, hardware + software • Interoperability/compatibility • Windows + MS Office • Google calendar + Gmail • due to branding, reputation, etc • Virgin Air, Virgin phone, etc.

  7. SIMS Implications for Market Structure • Scale + scope on cost/revenue sides imply: market cannot be "perfectly competitive” • bidding wars lead to downward price spirals • Britannica, Encarta, Wikipedia • spreadsheet wars in mid-80s • Two sustainable structures • Dominant firm/monopoly with entry barrier such as cost advantage, network effects (e.g., Microsoft)‏ • Differentiated product (e.g., magazines)‏ • …and combinations of above

  8. SIMS Example of commoditized information • CD ROM phonebooks: 1986: Nynex charged $10,000 per disk for NY directory • Nynex employee + consultant started rival product • Hired Chinese workers at $3.50 daily wage • Partnership broke up • Bidding war between ProCD and Digital Directory Assistance (Bertrand competition)‏ • Competitive price reductions • Price forced to marginal cost

  9. SIMS Other examples of commoditization? • What are some other examples of information commoditization?

  10. SIMS What to do to achieve sustainability • Exploit economies of scale and scope on demand side and supply side • Supply side/cost strategy • …but if everyone tries to do it, watch out • …first-mover (really best-mover) advantage • Demand side strategy • build a network/community: eBay, YouTube • move to advertising model • differentiate your product • add value to the raw information to distinguish yourself from the competition • target specific markets (as with social networking sites)‏ • compare MySpace, Facebook

  11. SIMS Cost Strategies for Commodity Business • Reusability: sell the same thing over again • Baywatch, Reuters, FoodTV, SciFi channel • Reduces average cost • Look for supply-side economies • scale: natural in info business • scope: often arises

  12. SIMS Revenue Strategies for Commodity Business • Differentiate your product • West Publishing and page numbers • Google API to Maps: User Created Content • Look for demand-side economies • scale: network effects (e.g., via community)‏ • scope: interoperability, branding, reputation, bundling

  13. SIMS First-mover Advantages • Avoid greed • Respond to threat quickly and decisively • Example: Intuit and Microsoft • Limit pricing to discourage entry • highly credible with high sunk costs to entry • Play tough • Discourage future entry • Microsoft: “Embrace and extend…” • Engage in constant innovation (Amazon, Google)‏ • Value to incumbent of controlled experiments • Example of MSN search

  14. SIMS Hard to do for Incumbent • May not recognize threat till too late • CP/M • Wordstar • VisiCalc • AOL

  15. SIMS Personalize Your Product • Personalize product, personalize price • Search-based advertising • Google, Yahoo, MSN chief players • Pay per click model • Auction off the best positions • Very effective ads due to high relevance • Very high margins due to low marginal cost • Will explore in detail later…

  16. SIMS Know Your Customer • Registration • Required: NY Times • Billing: Wall Street Journal • Yahoo/Microsoft: collect addresses • Allows demographic targeting via ZAG • Know user behavior • Observe queries • Observe clickstream • Yahoo and Microsoft: behavioral targeting • "Online retailers are watching you"

  17. SIMS Logic of Pricing • Quicken example • 1 million wtp $60, 2 million wtp $20 Price (Dollars)‏ $60 $40 $20 1 2 3 Quantity(Millions)‏

  18. SIMS Quicken example • Assumes only one price • Charging different prices gives $100 million • But how do you get at extra value? • Answer: market segmentation/price differentiation • Quicken Basic • Quicken Deluxe • Quicken Premier • Quicken Home and Business • But how to segment?

  19. SIMS Forms of Differential Pricing • Personalized pricing • Sell to each user at a different price • Versioning • Offer a product line and let users choose • Group pricing • Based on group membership/identity

  20. SIMS Personalized Pricing inTraditional Industries • Airlines and yield management • Direct mail and catalogs • Britannica experiment • Victoria’s Secret • Supermarket scanners • Profit margin more than doubled 1993-1996 • More effective than newspaper advertising due to targeting

  21. SIMS Promotional Pricing • Sales, coupons, rebates • Only worthwhile if these segment market – some use, some don’t • Offer credible signal of price sensitivity • By proving you are price sensitive, get a lower price • But by same token are a nuisance • "Rebates expiring"

  22. SIMS Personalized Pricing: new techniques on the Internet • Auctions • Ebay, Priceline, Dovebid,etc. • Will discuss in later lecture • Huge lock-in for auction markets due to network effects • Buyers want to be where sellers are and vice versa • Compare eBay US and Yahoo Japan auctions

  23. SIMS Group Pricing • Price sensitivity: traditional • low price to more elastic (sensitive) demand • Network effects, standardization • value of good goes up if your group adopts • significant switching costs for organization • site licenses offer big discount because of this • Product endorsement/viral market • “click here to email to a friend”

  24. SIMS Group pricing: price sensitivity • International pricing • US edition textbook: $70 • Indian edition textbook: $5 • Problems raised by Internet • Localization as partial solution • Keyboards, languages, etc. • Grey market in cameras and warantees

  25. SIMS Sharing as group pricing • Transactions cost of sharing • History of video rental • Only video sales • Rise of video rental • Pricing for ownership • Revenue sharing model • Academic journals • Library price (for shared copies)‏ • Individual price • Now: bundling

  26. SIMS Summary • Understand cost structure • Commodity market: be aggressive, not greedy • Avoid commoditization if you can: differentiate product and price • Understand consumer • Continual experimentation • Personalize products and prices

More Related