The Optimal Number of Versions: Why Does Goldilocks Pricing Work for Information Goods?

The literature in general suggests that selling multiple versions is more profitable than selling only a single version. However, how many versions should be offered is not as clear. Classical pricing studies suggest providing as many versions as the number of customer types, whereas some studies in information systems suggest providing only one or two versions. In reality, firms typically provide more than one or two versions, such as three in the case of Goldilocks pricing. This study explains the discrepancies in these results and observations by showing that, although profit increases with more versions, the marginal benefit of an additional version decreases rapidly. Therefore, firms sell few versions even in the presence of very small versioning-related costs such as menu and cognitive costs. This study analyzes the effects of these costs, and shows that cognitive costs have more profound effects on versioning than menu costs.

[1]  Hooman Estelami,et al.  The computational effect of price endings in multi‐dimensional price advertising , 1999 .

[2]  Noel Capon,et al.  Can Consumers Calculate Best Buys , 1982 .

[3]  Marvin A. Sirbu,et al.  Optimal bundling strategy for digital information goods: network delivery of articles and subscriptions , 1999 .

[4]  Hal R. Varian,et al.  Information rules - a strategic guide to the network economy , 1999 .

[5]  Hemant K. Bhargava,et al.  Economics of an Information Intermediary with Aggregation Benefits , 2004, Inf. Syst. Res..

[6]  Edmund H. Durfee,et al.  Automated strategy searches in an electronic goods market: learning and complex price schedules , 1999, EC '99.

[7]  E. Maskin,et al.  Monopoly with Incomplete Information , 1984 .

[8]  H. Varian,et al.  Versioning information goods , 2000 .

[9]  Hemant K. Bhargava,et al.  Information Goods and Vertical Differentiation , 2001, J. Manag. Inf. Syst..

[10]  K. Moorthy.  Market Segmentation, Self-Selection, and Product Line Design , 1984 .

[11]  Ganesh Iyer,et al.  Research Note Consumer Addressability and Customized Pricing , 2002 .

[12]  H. Varian,et al.  Internet Publishing and beyond: The Economics of Digital Information and Intellectual Property , 2000 .

[13]  Andrew B. Whinston,et al.  Bundling Information Goods of Decreasing Value , 2005, Manag. Sci..

[14]  M. Spence.  Multi-product quantity-dependent prices and profitability constraints , 1980 .

[15]  M. Lepper,et al.  The Construction of Preference: When Choice Is Demotivating: Can One Desire Too Much of a Good Thing? , 2006 .

[16]  Yannis Bakos,et al.  Bundling Information Goods: Pricing, Profits and Efficiency , 1998 .

[17]  A. Adam.  Whatever happened to information systems ethics? Caught between the devil and the deep blue sea , 2004 .

[18]  Indrajit Sinha,et al.  Consumers' perceptions of promotional framing of price , 2000 .

[19]  B. Kahn,et al.  Variety for sale: Mass customization or mass confusion? , 1998 .

[20]  Shin-yi Wu,et al.  Optimal Customized Bundle Pricing for Information Goods , 2002 .

[21]  Hooman Estelami,et al.  Strategic implications of a multi‐dimensional pricing environment , 2003 .

[22]  Lorin M. Hitt,et al.  Bundling with Customer Self-Selection: A Simple Approach to Bundling Low-Marginal-Cost Goods , 2005, Manag. Sci..

[23]  Rajiv M. Dewan,et al.  Consumers Prefer Bundled Add-Ins , 2003, J. Manag. Inf. Syst..

[24]  W. Kamakura,et al.  Optimal Bundling and Pricing Under a Monopoly: Contrasting Complements and Substitutes from Independently Valued Products , 2003 .

[25]  Ward Hanson,et al.  Optimal bundle pricing , 1990 .