Differential Pricing

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Competitive Strategies for Network Economies

• Differential Pricing

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Price Discrimination

• Smart cash registers
• Victorias Secret
• Amazon.com
• Infonautics

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The Pricing Problem

• Customers have different valuations (or
  willingness to pay) for products
• A single price cannot extrapolate all of the
  value
• Price Discrimination
• Charge prices which exploit the differences
  between consumers
• Price based on value not costs

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The Pricing Problem

• Identification
• How to differentiate values
• Selection
• How to select the pricing tool
• Calibration
• How to set the price
• Resale
• How to combat consumer retaliation

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Identification

• Registration
• Buying history
• Address, telephone number, etc.
• Observation
• Search choices
• Clickstream behavior
• Cheap real-time market research
• Browser information
• Computer / Operating System / Browser
• IP address / eMail address
• Any information that is correlated
  with preferences

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Examples (Tailoring ads)

• Go.com (observation)
• Cross-market information
• Search for automobiles
• See custom ads for cars and Amazon books
• Charge advertisers based on business
• AOL / The New York Times (registration)
• Bribes users to give demographics
• Zip code, age, gender, income

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Identification

• Media Metrix research
• Income distributions by operating system
• Online attitudes by domain / host
• On the other hand,
• Age, address harder to confirm
• Is identification easier online?

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Selection

• Differentiation based on price
• Exogenous signals (2nd degree)
• Perfect information (1st degree)
• Screening (3rd degree)
• Differentiation based on the product
• Versioning
• Personalization / Product differentiation
• Differentiation based on quantity
• Bundling / Quantity discounts
• Group pricing

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Selection

• Personalize or customize the product to
  generate the most value for your customers
• Establish pricing arrangements that capture as
  much of that value as possible
• AIRLINES !

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Demand for Airlines
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q
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Single Price
p
q
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Segmentation
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Calibration

• Promotions help measure demand
• Such experiments are easy on the Internet
• Reveal consumer price-sensitivity
• Determine demand for each group

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Group Pricing (Exogenous)

• Base prices on group identity
• Groups differ on
• Price sensitivity (age-based discounts)
• Network effects (common tasks)
• Lock-in (reliance on technology)
• Sharing (distribution)
• Sharing (Site License)
• Does the group have an advantage in distribution
  (transaction costs)?
• Segmentation sell to high-value users, allow
  sharing among low-value users

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Group Sharing

• A durable good may be used multiple times by
  multiple users
• If a good is not used intensively, its value to
  an individual may be low
• This introduces the possibility of sharing by
  groups of consumers
• The seller can manage this directly, through
  renting, site licenses, or leasing
• Or the good may be sold to an intermediary, which
  handles the sharing,
• e.g, The Electric Library offered by Infonautics

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Quantity Discounts

• Broker Initial Cost/Order
• Ameritrade 2000 8
• ETrade 1000 15
• Schwab 500 (saver) 30

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Quantity Discounts

• Consumer Surplus
• Charge Surplus as entry fee

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Quantity Discounts

• Clubs / Memberships
• Hidden discounts
• Example
• Time To Relax cassettes at Conscious Living
• Quantity Price per Total
• 5 6 30 104x5
• 10 5 50 104x10
• 20 4.50 90 104x20

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Challenges

• Resale
• Price information and envy
• Copying
• International Group pricing
• Localization
• Anonymity and Group Posing

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