Thesis (Ph. D.)--University of Rochester. William E. Simon Graduate School of Business Administration, 2010.
This dissertation consists of three essays that examine, in three specific contexts, issues
related to pricing of information goods and services.
As the ability to measure technology resource usage gets easier with increased connectivity,
the question whether a technology resource should be priced by the amount of the
resource used or by the particular application of the resource has become an important
question. In the first essay, this question is examined in the context of pricing of wireless
services: should the price be based on the application, e.g., voice, multimedia messages,
short messages, or should it be based on the traffic generated? Contrary to the prevailing
opinion that hold that consumers prefer pricing based on traffic alone and carriers
prefer application-based discrimination, I show that in some instances consumers will
prefer application-based discrimination, and that in some carriers will not prefer such
discrimination.
The first essay uses a deterministic model to analyze the impact of application-based
pricing. However, deterministic models do not explain some other important pricing
issues such as those related to the commonly seen “Fixed Up To” (FUT) tariff. FUT
tariffs are made up of three parts: a monthly subscription fee, an included allowance (also
called the usage-limit), and an over-limit rate that applies to consumptions in excess of
the usage-limit. Using a stochastic model, I develop a closed-form expression for the
utility offered by a FUT pricing plan. I then examine the monopolists’ tariff design
problem in which heterogeneous consumers are offered a menu of FUT plans. I examine
both forms of consumer heterogeneity, the heterogeneity in the frequency of use and
that in the value obtained per use. I find that FUT tariffs lead to higher profits than do other two-part or nonlinear tariffs when consumers are heterogeneous. I also show
that, contrary to the findings in the literature on nonlinear pricing, there are situations
in which it is optimal for the carrier to serve both “high” and “low” type consumers
regardless of their relative sizes.
While the first two essays examine pricing of information services, the final essay focuses
on pricing of information goods in the context of software security and patching.
Software manufacturers provide “patches” to fix security vulnerabilities in their products
and to distribute functionality enhancements. Moreover, these days software manufacturers
have the ability to restrict the distribution of their patches to legal users only —
by doing do so they can reduce the incentive to pirate. However, not distributing security
patches to pirates or illegal users leads to significant negative network effects, which
lowers the legal users’ willingness-to-pay for the product. Likewise, not only distributing
functionality patches lowers the value of the pirated product but it also leads to a reduced
user base and a lower positive network effect. In this essay I analyze these trade-offs and
explain how different patch distribution strategies impact the equilibrium demand and
profit of a monopolist. I explain how the consumer heterogeneity in piracy costs impacts
the relative attractiveness of different strategies. Further, contrary to the prevailing wisdom
on positive network effects, I show that supporting pirates with patches is not the
best option when the positive network effect is very strong. I also explore the possibility
that a software manufacturer may make certain patches available for a price, and show
that such patch-pricing is effective only if consumers are heterogeneous with regard to
their piracy costs.