efficient pricing of geomarketing internet services european vs. american approach alenka krek...
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Efficient Pricing of Geomarketing Internet Services
European vs. American Approach
Alenka Krek Technical University of ViennaDepartment of Geoinformation
Overview
• Geomarketing service• Pareto efficiency• Marginal cost pricing• Nonlinear pricing• European vs. American
approach• Conditions for the efficient
nonlinear pricing
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Geomarketing Service
Geomarketing service is a service of providing geomarketing information to the user.
Geomarketing information is information which enables the user to take better and faster decisions about sales activities.
6th EC GI & GIS 2000, Lyon, France
statistic
demographic geographic
Geomarketing DatasetsInternal company’s data are combined with external statistic, demographic and geographic data.
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Geomarketing Service Provider
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The service provider has to decide about:•Product: the Geoinformation product•Medium of delivery•Price
Motivation: How to set an efficient price for geoinformation services?
Pareto Efficiency
The situation is Pareto efficient if there is no way to make both the user and the service provider better off.
It can be also understood as maximizing the difference between economic benefits and costs.
6th EC GI & GIS 2000, Lyon, France
Marginal Cost Pricing
Marginal cost pricing is pricing where the price is set to be equal to the marginal cost.
Marginal cost is cost of producing an additional copy of the product.
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Cost of Information Products
High fixed cost of producing the first copy of the information product.
Low or zero marginal cost of producing an additional copy of the information product.
6th EC GI & GIS 2000, Lyon, France
Pareto Efficiency of Marginal Cost Pricing
Marginal cost pricing may or may not be efficient: it depends on how the user’s total willingness to pay relates to the total cost of providing the good.
Marginal cost pricing of Geoinformation product does not cover the total cost and is therefore not Pareto efficient.
6th EC GI & GIS 2000, Lyon, France
Nonlinear Pricing
Pricing is nonlinear when it is not strictly proportional to the quantity purchased.
Different prices are charged to different groups of buyers for the same product.
6th EC GI & GIS 2000, Lyon, France
6th EC GI & GIS 2000, Lyon, France
Two-Part Tariff
P = p0 + p1.q
p0 fixed fee (annual, monthly,
membership)
p1 price set for a volume transferredq quantity transferred
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Is Two-Part Tariff Efficient?
P = p0 + p1.q
High fixed fee might exclude occasional users who are not willing to pay a membership or a license.
The necessary condition for Pareto efficiency is not satisfied.
6th EC GI & GIS 2000, Lyon, France
Quantity Discounts
The provider charges a lower price for a higher volume purchased.
Pareto efficiency depends on the price-volume categories.
They might disadvantage users with low willingness to pay.
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Term-Volume Commitments
The user agrees to pay a certain amount of money for the service in advance.
This strategy satisfies the Pareto efficiency requirement if the user can choose among different options which are designed indiscriminately.
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List of Price Options
Different options can be combined and offered as a list of price options.
In geomarketing services, the two-part tariff is often combined with uniform pricing scheme.
6th EC GI & GIS 2000, Lyon, France
List of Price Options
P = p0 + p1.q two-part tariff
P = p2.q uniform pricing scheme p0 fixed fee (annual, monthly, membership, etc.)
p1 price set for a volume transferred, membership option
p2 price set for a volume transferred, no membership option, (p2 > p1)
q quantity transferred
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Pareto Efficiency of a List of Price Options
Each user can choose between at least two pricing schemes;
• the uniform but higher price or • the nonlinear, two-part tariff
This policy assures that the users with the low willingness to pay are not disadvantaged and satisfies the requirements for Pareto efficiency.
6th EC GI & GIS 2000, Lyon, France
European vs. American Approach
The US and Canadian geomarketing services market has characteristics of oligopoly;
• several service providers• similar products • competition drives prices down
European market is determined by the high prices for base data and copyright restrictions.
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Conditions for Efficient Nonlinear Pricing
• Self-selection among two or more different pricing options
• Geoinformation products should be carefully designed and differentiated to satisfy the needs of a particular market segment
• Low prices of raw datasets enable new investors to enter geoinformation market
• Should not be illegal
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Thank you for your attention!
Questions?
6th EC GI & GIS 2000, Lyon, France