Jeffrey K. MacKie-Mason

Competition Between Firms that Bundle (Download full paper)

Fay, Scott and Jeffrey K. MacKie-Mason

Abstract: Information goods are characterized by high fixed (first-copy) costs, but very low costs for the production of additional copies. Marginal costs of electronically-delivered information goods have been further reduced by the remarkable recent decline in computing and digital communication costs. Most previous research focuses on how a monopolist would perform (and the proper regulation to impose) in such an environment. Achieving dynamic efficiency is difficult because pricing at marginal cost (which is statically efficient) eliminates the incentive to invest in the creation of new content. Recently, the strategy of bundling numerous goods together has been explored in greater detail. Bundling may achieve static efficiency since individuals will face a zero cost on the margin for each item consumed. Yet, dynamic efficiency can be maintained because the producer is able to recover investment costs through bundle sales. This paper analyzes the profitability and welfare properties of bundling in a multi-firm setting. This allows us to explore how incumbents and entrants interact when each firm is selling numerous competing products. Our fundamental conclusion is that even adding only a single firm to this industry with substantial fixed costs and negligible marginal costs will result in much lower prices for consumers, much higher social welfare, and only a moderate reduction in firms' profits regardless of the pricing schemes employed. This outcome is somewhat surprising given that in a standard static two-good Bertrand model, a duopoly would lead to a price war which eliminates the incentive to invest in new content (or to enter the industry in the first place). Although the firms are producing a priori identical items, consumers know that their valuations for the particular items will vary ex post. Thus, no price reduction by one firm can completely eliminate the demand faced by other firms. Although there remains an incentive to invest in new product creation, this incentive is lower than a monopolist would have. As a result, in a dynamic version of this model, the welfare superiority of the duopoly becomes dampened (but not eliminated). Finally, when firms are allowed to sell items both as a bundle and individually, we find that most revenue will be obtained from bundle sales. These results indicate that bundling will persist in a multi-firm setting and suggest that only firms of substantial size will be able to survive in such a market.

System Design, User Cost and Electronic Usage of Journals (Download full paper)

Gazzale, Robert S. and Jeffrey K. MacKie-Mason

Abstract: Dramatic increases in the capabilities and decreases in the costs of computers and communi-cation networks have fomented revolutionary thoughts in the scholarly publishing community. In one dimension, traditional pricing schemes and product packages are being modified or re-placed. We designed and undertook a large-scale field experiment in pricing and bundling for electronic access to scholarly journals: PEAK. We provided Internet-based delivery of content from 1200 Elsevier Science journals to users at multiple campuses and commercial facilities. Our primary research objective was to generate rich empirical evidence on user behavior when faced with various bundling schemes and price structures. In this article we explain the different types and levels of cost that users faced when accessing individual articles, and report on the ef-fect of these costs on usage. We found that both monetary and non-monetary user costs have a significant impact on the demand for electronic access. We also estimate how taking user costs into account would change the "optimal" (least cost) bundle of access options that an institution should purchase.

Model Selection in an Information Economy: Choosing what to Learn (Download full paper)

Christopher H. Brooks, Robert S. Gazzale, Rajarshi Das, Jeffrey O. Kephart, Jeffrey K. MacKie-Mason, and Edmund H. Durfee

Abstract: In an economy in which a producer must learn the preferences of a consumer population, it is faced with a classic decision problem: when to explore and when to exploit. If the producer has a limited number of chances to experiment, it must explicitly consider the cost of learning (in terms of foregone profit) against the value of the information acquired. Information goods add an additional dimension to this problem; due to their flexibility, they can be bundled and priced according to a number of different price schedules. An optimizing producer should consider the profit each price schedule can extract, as well as the difficulty of learning of this schedule. In this paper, we demonstrate the tradeoff between complexity and profitability for a number of common price schedules. We begin with a one-shot decision as to which schedule to learn. Schedules with moderate complexity are preferred in the short and medium term, as they are learned quickly, yet extract a significant fraction of the available profit. We then turn to the repeated version of this one-shot decision and show that moderate complexity schedules, in particular two-part tariff, perform well when the producer must adapt to nonstationarity in the consumer population. When a producer can dynamically change schedules as it learns, it can use an explicit decision-theoretic formulation to greedily select the schedule which appears to yield the greatest profit in the next period.

Pricing Information Bundles in a Dynamic Environment (Download full paper)

Jeffrey O. Kephart, Rajarshi Das, Christopher H. Brooks, Edmund H. Durfee, Robert S. Gazzale and Jeffrey K. MacKie-Mason

Abstract: We explore a scenario in which a monopolist producer of information goods seeks to maximize its profits in a market where consumer demand shifts frequently and unpredictably. The producer is free to set an arbitrarily complex price schedule-a function that maps the set of purchased items to a price-but without direct knowledge of consumer demand it cannot compute the optimal schedule. Instead, it must employ a form of optimization based on trial and error. By means of a simple model of consumer demand and a modified version of a simple nonlinear optimization routine, we study a variety of parameterizations of the price schedule and quantity some of the relationships among learnability, complexity, and profitability. In particular, we show that fixed pricing or simple two-parameter dynamic pricing schedules are preferred when consumer demand shifts frequently, but that dynamic pricing based on more complex schedules tends to be most profitable when consumer demand shifts very infrequently.

Pricing and Bundling Electronic Information Goods: Experimental Evidence (Download full paper)

MacKie-Mason, Jeffrey K., Juan F. Riveros and Robert S. Gazzale

Abstract: Dramatic increases in the capabilities and decreases in the costs of computers and communication networks have fomented revolutionary thoughts in the scholarly publishing community. In one dimension, traditional pricing schemes and product packages are being modified or replaced. We designed and undertook a large-scale field experiment in pricing and bundling for electronic access to scholarly journals: PEAK. We provided Internet-based delivery of content from 1200 Elsevier Science journals to users at multiple campuses and commercial facilities. Our primary research objective was to generate rich empirical evidence on user behavior when faced with various bundling schemes and price structures. In this article we report initial results. We found that although there is a steep initial learning curve, decision-makers rapidly comprehended our innovative pricing schemes. We also found that our novel and flexible "generalized subscription" was successful at balancing paid usage with easy access to a larger body of content than was previously available to participating institutions. Finally, we found that both monetary and non-monetary user costs have a significant impact on the demand for electronic access.