Jeffrey K. MacKie-Mason

Electronic Scientific, Technical, and Medical Journal Publishing and Its Implications (Download full paper)

MacKie-Mason, Jeffrey K. and Committee on Electronic Scientific, Technical, and Medical Journal Publishing

Published on: January, 2004

Abstract: The Symposium on Electronic Scientific, Technical, and Medical (STM) Journals and Its Implications addressed five key areas. The first two areas addressed--costs of publication and publication business models and revenue--focused on the STM publishing enterprise as it exists today and, in particular, how it has evolved since the advent of electronic publishing. The following section reviewed copyright and licensing issues of concern to the authors and to universities. The final two sessions looked toward the future, specifically, at what publishing may be in the future and what constitutes a publication in the digital environment.

A Report on the PEAK Experiment: Context and Design (Download full paper)

MacKie-Mason, Jeffrey K. Bonn, Maria S. Lougee, Wendy P. Riveros, Juan F.

Published on: June, 1999

The PEAK Experiment: Usage and Economic Behavior (Download full paper)

MacKie-Mason, Jeffrey K. Riveros, Juan F. Bonn, Maria S. Lougee, Wendy P.

Published on: January, 1999

'Bundling' y el Acceso Electronico a la Informacion Academica: El Projecto PEAK (Download full paper)

MacKie-Mason, Jeffrey K. Riveros, Juan F.

Published on: December, 1998

PEAK: Pricing Electronic Access to Knowledge (Download full paper)

MacKie-Mason, Jeffrey K. Jankovich, Alexandra

Published on: January, 1997

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.

Improving Learning Performance by Applying Economic Knowledge (Download full paper)

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

Abstract: Digital information economies require information goods producers to learn how to position themselves within a potentially vast product space. Further, the topography of this space is often nonstationary, due to the interactive dynamics of multiple producers changing their positions as they try to learn the distribution of consumer preferences and other features of the problem's economic structure. This presents a producer or its agent with a difficult learning problem: how to locate profitable niches in a very large space. In this paper, we present a model of an information goods duopoly and show that, under complete information, producers would prefer not to compete, instead acting as local monopolists and targeting separate niches in the consumer population. However, when producers have no information about the problem they are solving, it can be quite difficult for them to converge on this solution. We show how a modest amount of economic knowledge about the problem can make it much easier, either by reducing the search space, starting in a useful area of the space, or by introducing a gradient. These experiments support the hypothesis that a producer using some knowledge of a problem's (economic) structure can outperform a producer that is performing a naive, knowledge-free form of learning.

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.

Endogenous Differentiation of Information Goods Under Uncertainty (Download full paper)

Robert S. Gazzale and Jeffrey K. MacKie-Mason

Abstract: Information goods can be reconfigured at low cost. Therefore, firms can choose how to differentiate their products at a frequency comparable to price changes. However, doing so effectively is complicated by uncertainty about customer preferences, compounded by the fact that the search for a good product niche is carried out in competition with other searching firms. We study two firms that differentiate their information goods. The firms simultaneously compete in product configuration and price. We assume a non-uniform distribution of consumers: the largest number prefer a product located at a ``sweet spot,'' but the rate at which the customer density falls off away from this product configuration is unknown. Our characterization reflects the standard tradeoff between exploitation (current profit) and exploration (learning to enhance future profit). In our model firms balance current profits from competing for a mass and a niche market, while learning about the profitability of these alternative strategies. We show that the amount of learning that firms will undertake depends on the convexity or concavity of the profit function in the rate of demand fall-off. In our model firms have an incentive to learn, and can use both price and product configuration in order to explore. We show that the ability to explore in product characteristic space leads to a previously unidentified consequence of learning: attenuation of competition. The incentive to learn induces firms to differentiate their products more than they would if the value of learning were ignored. This leads to decreased direct competition with rivals, and thus higher prices and profits than if the firms were acting myopically. Thus, we might expect that when firms are not well informed about consumer preferences for information goods --- as might be especially true in new markets for innovative products --- product diversity will be higher and direct competition will be smaller than might otherwise be expected.

Information Bundling in a Dynamic Environment (Download full paper)

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

Abstract: Markets for digital information goods provide the possibility of exploring new and more complex pricing schemes, due to information goods' flexibility and negligible marginal cost. In this paper we compare the dynamic performance of price schedules of varying complexity under two different specifications of consumer demand shifts.

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.

Two-sided Learning in an Agent Economy for Information Bundles (Download full paper)

Kephart, Jeffrey O., Rajarshi Das and Jeffrey K. MacKie-Mason

Abstract: Commerce in information goods is one of the earliest emerging applications for intelligent agents in commerce. However, the fundamental characteristics of information goods mean that they can and likely will be offered in widely varying configurations. Participating agents will need to deal with uncertainty about both prices and location in multi-dimensional product space. Thus, studying the behavior of learning agents is central to understanding and designing for agent-based information economies. Since uncertainty will exist on both sides of transactions, and interactions between learning agents that are negotiating and transacting with other learning agents may lead to unexpected dynamics, it is important to study two-sided learning. We present a simple but powerful model of an information bundling economy with a single producer and multiple consumer agents. We explore the pricing and purchasing behavior of these agents when articles can be bundled. In this initial exploration, we study the dynamics of this economy when consumer agents are uninformed about the distribution of article values. We discover that a reasonable albeit naive consumer learning strategy can lead to disastrous market behavior. We find a simple explanation for this market failure, and develop a simple improvement to the producer agent's strategy that largely ameliorates the problem. But in the process we learn an important lesson: dynamic market interactions when there is substantial uncertainty can lead to pathological outcomes if agents are designed with "reasonable" but not sufficiently adaptive strategies. Thus, in programmed agent environments it may be essential to dramatically increase our understanding of adaptivity and learning if we want to obtain good aggregate outcomes.

Automated Strategy Searches in an Electronic Goods Market: Learning and Complex Price Schedules (Download full paper)

Brooks, Christopher H., Scott Fay, Rajarshi Das, Jeffrey K. MacKie-Mason, Jeffrey O. Kephart and Edmund Durfee

Abstract: In an automated market for electronic goods new problems arise that have not been well studied previously. For example, information goods are very flexible. Marginal costs are negligible and nearly limitless bundling and unbundling of these items are possible, in contrast to physical goods. Consequently, producers can offer complex pricing schemes. However, the profit-maximizing design of a complex pricing schedule depends on a producer's knowledge of the distribution of consumer preferences for the available information goods. Preferences are private and can only be gradually uncovered through market experience. In this paper we compare dynamic performance across price schedules of varying complexity. We provide the producer with two machine learning method producer that is performing a naive, knowledge-free form of leanings (function approximation and hill-climbing) which implement a strategy that balances exploitation to maximize current profits against exploration of the profit landscape to improve future profits. We find that the tradeoff between exploitation and exploration is different depending on the learning algorithms employed, and in particular depending on the complexity of the price schedule that if offered. In general, simpler price schedules are more robust and give up less profit during the learning periods even though in our stationary environment learning eventually is complete and the more complex schedules have high long-run profits. These results hold for both learning methods, even though the relative performance of the methods is quite sensitive to choice of initial conditions and differences in the smoothness of the profit landscape for different price schedules. Our results have implications for automated learning and strategic pricing in non-stationary environments, which arise when the consumer population changes, individuals change their preferences, or competing firms change their strategies.