Pricing Digital Goods: Discontinuous Costs and Shared Infrastructure

Authors:
Ke-Wei Huang;Arun Sundararajan
Affiliations:
Department of Information Systems, National University of Singapore, Singapore 117543;Leonard N. Stern School of Business, New York University, New York, New York 10012
Venue:
Information Systems Research
Year:
2011

Citing 19
Cited 1

Pricing computer services: queueing effects

Communications of the ACM
Optimal control theory with economic applications

Optimal control theory with economic applications
Optimal incentive-compatible priority pricing for the M/M/1 queue

Operations Research
User delay costs and internal pricing for a service facility

Management Science
The untapped potential of IT chargeback

MIS Quarterly
Bundling Information Goods: Pricing, Profits, and Efficiency

Management Science
Bundling and Competition on the Internet

Marketing Science
Integrating User Preferences and Real-Time Workload in Information Services

Information Systems Research
Research Report: Intrafirm Resource Allocation with Asymmetric Information and Negative Externalities

Information Systems Research
Pricing Access Services

Marketing Science
Pricing of Information Products on Online Servers: Issues, Models, and Analysis

Management Science
Pricing and Priority Auctions in Queueing Systems with a Generalized Delay Cost Structure

Management Science
Managing Digital Piracy: Pricing and Protection

Information Systems Research
Nonlinear Pricing of Information Goods

Management Science
On the Optimality of Fixed-up-to Tariff for Telecommunications Service

Information Systems Research
Bundling with Customer Self-Selection: A Simple Approach to Bundling Low-Marginal-Cost Goods

Management Science
Product Development and Pricing Strategy for Information Goods Under Heterogeneous Outside Opportunities

Information Systems Research
Perceived chargeback system fairness in decentralized organizations: an examination of the issues

MIS Quarterly
Mapping chargeback systems to organizational environments

MIS Quarterly

Optimal mediated auctions with endogenous participation

Decision Support Systems

Quantified Score

Hi-index	0.00

Visualization

Abstract

In this paper, we analyze a model of usage pricing for digital products with discontinuous supply functions. This model 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. Such goods are often modeled as information goods with zero variable costs; in fact, the actual cost structure resembles a mixture of zero marginal costs and positive periodic fixed costs. This paper discusses the properties of a general solution for the optimal nonlinear pricing of such digital goods. We show that the discontinuous cost structure can be accrued as a virtual constant variable cost. This paper applies the general solution to solve two related extensions by first investigating the optimal technology capacity planning when the cost function is both discontinuous and declining over time, and then characterizing the optimal costing for the discontinuous supply when it is shared by several business profit centers. Our findings suggest that the widely adopted full cost recovery policies are typically suboptimal.