Best Pricing Strategy for Information Services

Abstract

This paper examines which of three commonly-used pricing schemes – flat fee pricing, pure usage-based pricing, and two-part tariff pricing – is optimal for a monopolist providing information services. Our analysis suggests that under zero marginal costs and monitoring costs, when customers are homogeneous or when customers have different downward sloping demand curves, flat fee pricing and two-part tariff pricing achieve the same profit level, and dominate usage-based pricing. However, when customers are characterized by heterogeneous maximum consumption levels, the two-part tariff pricing is the most profitable among the three. We also examine how sensitive the optimal pricing scheme is to marginal costs and monitoring costs. Our analysis shows that when the sum of the marginal costs and the monitoring costs is below a threshold value, flat fee pricing is the optimal scheme regardless of how large or how small the monitoring costs are (as long as they are positive) when customers are homogeneous or have heterogeneous marginal willingness to pay. Positive marginal costs also do not change this result; but when monitoring costs are zero, the two-part tariff becomes one of the optimal pricing schemes.