electronic commerce product choice and discriminatory pricing

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 proc

ess 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

Magnitu

de o

f Eff

ort

High-talented students

Low-talented students

Wage L Wage 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)

w(y)

y

C1=a1y

Y*

B'

B"y

C2=a2y

Y*

B*

B"

w(y)

生產力低者求學的成本高(a1>a2),B=W-C,B">B'( ),B*>B"( ),低生產力者 高生產力者

Y*, 0, .則高生產力者高學歷 低生產力者低學歷 區隔成功

0

1

2

1

2

0Education 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)

w(y)

y

C1=a1y

Y*

B'

B"

y

C2=a2y

Y*

B*

B"

w(y)

(a1>a2),B=W-C,B">B'( ),B*<B"生產力低者求學的成本高 低生產力者( ), 0, , .高生產力者 則低生產力者低學歷 高生產力者並不拿學歷者 區隔不成功

. q1 , .大家都不去受教育了 若 越大 則高生產力者越會去拿學位

0

1

2

1

2

0

2-q1 2-q1

High-talented guysLow-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)

w(y)

y

C1=a1y

Y*

B'

B"

y

C2=a2y

Y*

B*

B"

w(y)

(a1>a2),B=W-C,B"<B'( ),B*>B"生產力低者求學的成本高 低生產力者( ), Y*, ,高生產力者 則高低生產力者都拿學歷 即使獲得平均報酬

. , a1 , Y* , .因此區隔不成功 所以 若 越小 或是 太小 都將驅使低生產力者也去拿學位

0

1

2

1

2

0

2-q1 2-q1

Low-talented guys High-talented guys