Pricing InformationInformation Is A CommoditySlide 3Britannica v. EncartaSlide 5Production (Creation) CostsSlide 7Slide 8Marginal (Reproduction) CostsSlide 10Commoditized Information ExampleImplications for Market StructureIf You are in Commodity BusinessDifferentiate ProductFirst-mover AdvantagesHard to do for IncumbentPersonalize Your ProductKnow Your CustomerLogic of PricingDemand CurveForms of Differential PricingDiscussion QuestionSlide 23Price Sensitivity & The InternetThe Future of Information CostsSummaryENDInformation Rules:A Strategic Guide to the Network EconomyPricing InformationCarl ShapiroHal R. Varianmodified from the original by J Smith & M KleinInformation RulesSpring 982Information Is A Commodity•Subject to market conditions•Usually has high creation costs•Benefits from low marginal costs•Threatened by further commoditizationInformation RulesSpring 983Information Is A Commodity•Subject to market conditionsExamples ---News & Journals (free vs paid vs registration-required)Manuals, repair guides, how-to booksRecipes/cookbooksInformation RulesSpring 984Britannica v. Encarta•Britannica: 200 years, $1,600 for set•1992: Microsoft purchased Funk & Wagnalls to make Encarta•Britannica response–Online subscription at $2,000 per year–Sales dropped 50% between 1990 and 1996–Online subscription at $120–CD for $200, since 1996 $70-$125Information RulesSpring 985Information Is A Commodity•Subject to market conditions•Usually has high creation costsInformation RulesSpring 986Production (Creation) Costs•First-copy – i.e., creation - costs dominate–Sunk costs - not recoverableExamples ––Traditional business examples•Property•Movie Script–Information business examples•Interactive DVDs (including educational and gaming)Information RulesSpring 987Production (Creation) Costs•First-copy – i.e., creation - costs dominate–Sunk costs - not recoverableTrue, but sometimes they’re very lowInformation business example•Million Dollar Home PageInformation RulesSpring 988Information Is A Commodity•Subject to market conditions•Usually has high creation costs•Benefits from low marginal costsInformation RulesSpring 989Marginal (Reproduction) Costs•Variable costs small; no capacity constraints–Microsoft has 92% profit margins–Million Dollar Home Page costs = $50/year?•Significant economies of scale–Marginal cost less than average cost–Declining average cost–Click-&-Mortar is cheaper than Brick-&-Mortarso it impacts traditional business tooInformation RulesSpring 9810Information Is A Commodity•Subject to market conditions•Usually has high creation costs•Benefits from low marginal costs•Threatened by further commoditizationInformation RulesSpring 9811Commoditized Information Example•CD ROM phonebooks•1986: Nynex charged $10,000 per disk for NY directory•ProCD and Digital Directory Assistance•Chinese workers at $3.50 daily wage•Bertrand competition–Start at $200 each–Price forced to marginal costInformation RulesSpring 9812Implications for Market Structure•Cannot be "perfectly competitive"•Examples of the 2 sustainable structures–Dominant firm/monopoly•AOL/Time-Warner–Differentiated product•Ask Jeeves•…and combinations of above•GoogleInformation RulesSpring 9813If You are in Commodity Business•Cost leadership•Sell the same thing over again–Baywatch, Reuters–Reduces average costInformation RulesSpring 9814Differentiate Product•Bigbook and maps (digitized yellow pages)•West Publishing and page numbers•Copyright and contentWhat about more current examples?Information RulesSpring 9815First-mover Advantages•Avoid greed–Respond to threat quickly and decisively–Limit pricing; highly credible with high FCs•Play tough–Discourage future entry–Protects expression, not ideas–Imitation as a strategy–Constant innovation (search engines)Information RulesSpring 9816Hard to do for Incumbent•May not recognize threat till too late–CP/M – Commodore/Atari/Amiga/etc.–Wordstar -- WordPerfect–VisiCalc – Lotus 1-2-3What about more current examples?–Alta Vista?Information RulesSpring 9817Personalize Your Product•Personalize product, personalize price– My Yahoo!, My eBay– Priceline (airline tickets)• Hot words (in cents/view)–Deja News: 2.0 4.0–Excite: 2.4 4.0–Infoseek: 1.3 5.0–Yahoo: 2.0 3.0Information RulesSpring 9818Know Your Customer•Registration–Required: NY Times–Billing: Wall Street Journal–AOL’s ace in hole: ZAG•Know your consumer–Observe Queries–Observe Clickstream–Conduct Usability Tests (eye-tracking, e.g.)Information RulesSpring 9819Logic of Pricing•Quicken example–1 million wtp $60, 2 million wtp $20?–Demand curve (next slide)–Assumes only one price•Price discrimination gives $10 million–Problems• How do you know wtp?• How do you prevent arbitrage?Information RulesSpring 9820Demand CurvePrice(Dollars)Quantity (Millions)$20$40$601 2 3Information RulesSpring 9821Forms of Differential Pricing•Personalized pricing–Sell to each user at a different priceEx: priceline, ebay, google adwords–Can exert both a downward and upward pressure on price•Versioning–Offer a product line and let users chooseEx: Adobe Photoshop–Discussed in detail in a later chapter•Group pricing–Based on group membership/identityEx: Student discounts on popular software (studica.com)–Subject to price sensitivity, network effects, lock-in & sharingInformation RulesSpring 9822Discussion Question•How have search engines impacted the price of information?Information RulesSpring 9823Discussion Question•How have search engines impacted the price of information?•Google adwords & auctionsInformation RulesSpring 9824Price Sensitivity & The Internet•International pricing•US edition textbook: $70 vs Indian edition: $5 •Pharmaceuticals: US vs Canada•Auctions•Price pressures ––Price forced steeply higher–Price forced significantly lower•Product Search Engines•Froogle•Hot Deals•Price GrabberInformation RulesSpring 9825The Future of Information Costs•What will impact future information costs?•Will information become cheaper or costlier?–Can information become “priceless” in the way that more tangible assets do (“Liberty Bell”)?•Who will pay [most] for information?–Individual seeking privacy?–Government seeking transparency?–Industry seeking