Pricing Informational Goods

Information Goods
Information goods are:
• Intangible
• Experience goods
• Heterogeneous
• Easily transmutable
• High fixed cost, zero or low incremental costs (marginal costs is close to zero)
• Shared public goods features
Internet is eminently suited to online distribution of information goods. All can be stored in digitised form and distributed at relatively low cost.
Information goods are normally expensive to produce but then reproduction is relatively cheap. For example: the cost of producing a Hollywood feature film is expensive, but then it is possible to make near-perfect copies of the first print at negligible cost.
Marginal cost is close to zero. Pricing based on marginal cost is not in the producers’ interest because they will be unable to recover fixed costs.
Search Costs/Price Dispersion/Switching Costs.
Because information goods are general standardised they are amendable to search and price comparison services. Now able to rank the retailers and also rank including delivery charges.
In theory, the ability to search for the lowest price, combined with relative ease of switching from one online seller to another, should create intense price competition in online markets for homogeneous goods. If search costs and switching costs are low, we should expect that firms with high prices not able to survive hence price dispersion should be lower in online markets.
Price dispersion results:
• Clay et al (2000) found that the standard deviation of online prices for books, varies from 17% - 28%
• Brynjolfsson & Smith (2000a) found that the difference between the lowest price and the tenth lowest price averaged as much as 33% for books
Results suggest that products are ‘not quite homogeneous’, and switching costs may ‘be positive’:
• Creating a username and password, filling out multiple forms
• Loyalty schemes e.g. Drugstore.com – give potential advice of prescription drugs.
• Amazon.com – provides expedited delivery & single click...