Question

Illustrating the cost characteristics of information goods, how these characteristics affect firms' competitive pricing strategy.

Answer 1

• Although information economy has been the focus of considerable research, no unified and exhaustive classification model for current pricing methods exists. This work presents a novel unifying pricing framework. Each category in the framework is defined by the structural elements that accounts for its behaviour and particular aims. he benefits of the unifying framework are that it provides a conceptual abstract model that differentiates between different pricing methods, and positions the future effectual pricing methods.
• Information goods differ from physical goods in several ways. An information good is mainly a ‘collection of symbols’, and its value primarily derives from the precise arrangement of these symbols, rather than from the medium used for their preservation and transmission. Naturally, information goods are intangible and can be classified as ‘experience goods’, as potential consumers typically have to experience the good to understand its quality
• While one of the primary issues of concern for physical product manufacturers is the level of investment in capacity, the issue of concern to most information good manufacturers relates to quality and the number of versions to offer, rather than quantity. A related characteristic of information goods is that, they tend to be “public goods1”, with the ‘degree of publicness’ largely depending on the state of the technology (the medium of transmission, in particular) and the legal regime
• These unique features of information goods raise a lot of issues, create new challenges and provide novel opportunities for manufacturers and sellers. Traditional cost-based pricing strategies can be very misleading and firms would have to devise new value-based pricing strategies for information goods. The differences between information/digital goods and physical goods have profound consequences for the pricing and competitive strategies of firms, for consumer welfare, as well as for policy makers and regulatory authorities.
• A monopolist sells highly customisable information goods with zero marginal cost and zero cost of customisation. Intelligent agent technologies enable the seller to interact with every potential buyer, allowing the monopolist to price independently for each buyer.
• The digital economy challenges conventional theories of pricing, positioning and productstrategies of information-intensive products and firms. Many of the key results that shaped modern reasoning about price and product competition were derived in the context of industrial goods, where the most important cost factors are the costs of production and physical distribution. Some of these results are broad enough to incorporate information goods as special cases; but some of them are not.