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 use of the resource has become increasingly important. We examine this issue in the context of pricing of wireless services: should the price be based on the service, e.g., voice, multimedia messages, short messages, or should it be based on the traffic generated? Many consumer advocates oppose discriminatory pricing across services believing that it enriches carriers at the expense of consumers. The opposition to discrimination has grown significantly, and it has even prompted the U.S. Congress to question executives of some of the biggest carriers. With this ongoing debate on discrimination in mind, we compare two pricing regimes here. One regime, namely, service pricing, involves pricing different services differently. The other one, namely, traffic pricing, involves pricing the traffic (i.e., bytes) transmitted. We show why the common wisdom, that discriminatory pricing across services increases profits and harms consumers, may not always hold. We also show that such discrimination can increase social welfare.
Application-based pricing is common in telecommunications. Wireless carriers charge consumers more per byte of traffic for text messages than they do for wireless surfing or voice calls. Such pricing is possible because carriers and handset manufacturers have the ability to tag and meter each application. While tagging and metering are possible in the case of closed platforms such as iPhone, they are not in the case of open platforms such as Android. Android is open source with open application programming interfaces, and anyone can develop applications for it. Because the carriers have little control over applications, Android is inherently disruptive of differential pricing across applications. Users and neutrality advocates support Android, believing that it can increase consumer surplus by disrupting differential pricing. However, we show that the equilibrium under differential pricing is different from the equilibrium under open platforms, and it is particularly so with regard to the sets of consumers served and the quantities consumed. With open platforms, certain consumers are either not served or they are served a quantity that is less than what they would be served under differential pricing. Consequently, the consumer surplus and the social surplus are often lower with open platforms. Similarly, firms are expected to prefer differential pricing. We show that this expectation is also not true under certain circumstances in which open platforms and neutral pricing work like a quasi-bundle.
This article discusses various articles published within the issue including one on consumer informedness, one on suppliers and electronic procurement, and one on the theory of newly vulnerable markets.
Information displayed on an e-commerce site can be used not just by the intended customers but also by competitors. While retailers enhance service quality by linking inventory systems to Web servers and making stockout information available in real time, that stockout information could also be used by competitors in determining their prices on current stocks. In this paper, we examine the effect of such proactive use of information in the setting of e-commerce retailing where duopoly retailers set their prices of a commodity that is in short supply. We show that when customer reservation value is relatively high and retailers are differentiated in fill rate, both retailers choose the dynamic pricing strategy in equilibrium. By investing in Web scraping technology, retailers automatically monitor each other's stock status and dynamically adjust prices contingent on rival's stock availability.
Although the Web has grown to several billion pages over the past few years, just a few of the Web sites get most of the visits. Such sites, called portals, attract visitors and advertisers and provide a lot of valuable content at no charge to the visitors. The portals attract a disproportionate amount of the Internet advertising dollars and have the ability to influence the success of new electronic commerce ventures. Using monthly audience data, we examine relative market shares of Web sites in search engines, travel, financial, news, and other categories. We find clear evidence of increasing disparity in page views, with the top Web sites getting an increasing share of the market. Using economic modeling, we show that this disparity is a result of a development externality that exists in this industry: the sites that have more viewers get more revenues; this in turn allows them to develop more content and attract an even greater number of viewers.
Software such as operating systems, word processing, spreadsheets, graphics, and others often serves as a base for a number of third-party add-in products or plug-ins. These add-ins enhance the functionality of the base product. Unless protected by patents, these add-ins can potentially be bundled into the base software. The impact of this bundling on the profits of the base software producer and the consumer depends on the proportion of consumers that value the add-in and the penalty that some consumers incur from finding only a bundled product available when they do not desire the add-in. Using a model of the market, we show that the price of the bundle will be less than the sum of the prices of the base and add-in software when they are sold separately. We also show that the total consumer surplus and the social welfare increase if the base software producer's profit increases with bundling.
A key decision by the manager of an advertisement-supported Web site is the balance between content and advertising. Content is costly but attracts viewers, whereas advertisement generates revenues but repels viewers. The period-by-period balancing decision is further complicated by the growth and diffusion nature of Web site viewership. This decision problem is modeled as a control problem that captures the essence of the business model of such Web sites. Using this model we show that it may be optimal for the Web site to initially have negative cash flows from having fewer advertisements and more content. This is more than compensated for by future profits from the Web site. We use the solution to the control problem to also develop a forward-looking measure of Web traffic called the 'discounted total traffic.' We empirically examine this new measure and find that it better predicts market capitalization than backward-looking measures like page views.