Electronic Commerce Product Choice and Discriminatory Pricing

Product differentiation Differentiated goods MS Word vs. WordPerfect Competition/substitution effect Different goods MS Word vs. cereal Complement effect? Horizontal differentiation Differences based on appearance and taste Vertical differentiation Most customers agree that one is better than the others in quality if their prices are the same.

A case of horizontal differentiation — Hotelling ’ s location competition The evolutionary ending?

Price discrimination First-order discrimination Different prices enforced by the seller through natural/visible signals Product-and-buyer matching Second-order discrimination Different prices self-enforced by the buyers in the way of self-selection Incentive compatibility (intrinsic) Full discrimination Charged by marginal utility individually High differentiation costs

Incentive to differentiation Chamberlinian monopolistic competition As long as there is no entry barrier, the process of offering slightly additional difference to exploit the more profit opportunity will result in zero-profit for all competitive firms. Segmentation  targeting  positioning & differentiation Struggling against commoditization

Pricing discrimination in Internet commerce Gaining the customer preference through surfing/purchasing behavior Privacy problems Customization without/with low additional costs Billing independently Negotiable possibility Bargaining openly (many participants) Bargaining secretly (few participants)

Possibility of customization The knowledge of what a buyer wants The ability of product transmutation The degree of digitalization Reduce customer arbitrage (the possibility of redistribution) Reduce waste (lean/flexible production) The feasibility of price discrimination

Use of user information Obtaining identifiable information for the prospective buyer Primary customer information Data collected form transactions directly Secondary customer information Data derived from cross-reference/matching

Identifiable customer information (Equifax.com) Identity information Employment data Credit history Public record information Credit inquiry information

Privacy and anonymity Web access log and cookies Anonymity as a myth Traceable back to the originator technically Protection by the privacy law Use by permission Authentication by the trusted third party Market approaches Incentive for voluntarily-revealing information

Pricing digital products Standard U-shaped cost structure

Different pricing situations

Pricing by quality choice Not quantity Marginal cost curve for accuracy

Pricing discrimination by quality

Incentive compatible pricing mechanism

Selling vs. renting If the product value is much less than the cost of the product, no one will be willing to purchase it. The club goods (between private goods and public goods) Buying collectively and consumption by renting

Pricing by bundling Packing two or more products and selling the bundle in fixed proportions. Quantity-depended pricing: more discount for larger bundle (Pure bundling strategy) If the components of a bundle are also sold individually, we called this a mixed bundling strategy. Microsoft ’ s Office bundle: Word, Excel, Access, … Tie-in: a bundle with some value primaries and some adjustable minors.

Incentive compatibility in education market Education level Magnitude of Effort High-talented students Low-talented students Wage LWage H

A separating wage scheme The employer expects an equilibrium state that high-talented interviewee with a higher education level is paid by a higher payment in contrast to the low-talented one with a lower education level is paid lower.

Spence ’ s educational signaling model (separate equilibrium) Education level Low-talented guys High-talented guys

The first confusing situation emerges If the employer experienced many low- educated employees performing very well, he may switch to pay an average wage between high- and low-talented employees when he faced a low- educated interviewee. The proportion of low-talented employees : q1

Spence ’ s educational signaling model (mix equilibrium) High-talented guys Low-talented guys

The second confusing situation emerges If the employer faced too many high- educated interviewees, he may switch to pay those who obtained higher degree an average wage between high- and low-talented employees unless they got a lower degree education. The proportion of low-talented employees : q1

Spence ’ s educational signaling model (mix equilibrium) Low-talented guys High-talented guys