Essays On Information And Prices

"This dissertation consists of three essays that examine, in three specific contexts, issues related to pricing of information goods and services. As the ability to measure technology resource usage gets easier with increased connectivity, the question whether a technology resource should be priced by the amount of the resource used or by the particular application of the resource has become an important question. In the first essay, this question is examined in the context of pricing of wireless services: should the price be based on the application, e.g., voice, multimedia messages, short messages, or should it be based on the traffic generated? Contrary to the prevailing opinion that hold that consumers prefer pricing based on traffic alone and carriers prefer application-based discrimination, I show that in some instances consumers will prefer application-based discrimination, and that in some carriers will not prefer such discrimination. The first essay uses a deterministic model to analyze the impact of application-based pricing. However, deterministic models do not explain some other important pricing issues such as those related to the commonly seen "Fixed Up To" (FUT) tariff. FUT tariffs are made up of three parts: a monthly subscription fee, an included allowance (also called the usage-limit), and an over-limit rate that applies to consumptions in excess of the usage-limit. Using a stochastic model, I develop a closed-form expression for the utility offered by a FUT pricing plan. I then examine the monopolists' tariff design problem in which heterogeneous consumers are offered a menu of FUT plans. I examine both forms of consumer heterogeneity, the heterogeneity in the frequency of use and that in the value obtained per use. I find that FUT tariffs lead to higher profits than do other two-part or nonlinear tariffs when consumers are heterogeneous. I also show that, contrary to the findings in the literature on nonlinear pricing, there are situations in which it is optimal for the carrier to serve both "high" and "low" type consumers regardless of their relative sizes. While the first two essays examine pricing of information services, the final essay focuses on pricing of information goods in the context of software security and patching. Software manufacturers provide "patches" to fix security vulnerabilities in their products and to distribute functionality enhancements. Moreover, these days software manufacturers have the ability to restrict the distribution of their patches to legal users only -- by doing do so they can reduce the incentive to pirate. However, not distributing security patches to pirates or illegal users leads to significant negative network effects, which lowers the legal users' willingness-to-pay for the product. Likewise, not only distributing functionality patches lowers the value of the pirated product but it also leads to a reduced user base and a lower positive network effect. In this essay I analyze these trade-offs and explain how different patch distribution strategies impact the equilibrium demand and profit of a monopolist. I explain how the consumer heterogeneity in piracy costs impacts the relative attractiveness of different strategies. Further, contrary to the prevailing wisdom on positive network effects, I show that supporting pirates with patches is not the best option when the positive network effect is very strong. I also explore the possibility that a software manufacturer may make certain patches available for a price, and show that such patch-pricing is effective only if consumers are heterogeneous with regard to their piracy costs."--Leaves v-vi.