Pricing the information goods in the presence of product depreciation and Word-of-Mouth effects

Abstract

While information goods nowadays represent a significant product category in the emerging digital economy, limited understanding has been obtained on the optimal pricing strategies. On one hand, information goods, like traditional goods, are subject to value depreciations over time; on the other, they differs from traditional goods in negligible production cost and the sensitivity to peer effects. This paper provides a comprehensive analytical analysis for pricing information goods under 2 × 2 scenarios. On one dimension, two types of products with distinctions in the value depreciation, self- and time-depreciation products, are considered; on the other, two prevalent pricing schemes, licensing and subscription fee models, are studied. We obtain closed-form solutions for all the models, which suggest that vendors of time-depreciation information goods should adopt subscription fee model to attract early adopters and exploit the Word-of-Mouth effects (WOM), while the vendors of time-depreciation information goods should strategically look over the strengths of both depreciation and WOM effects. Interestingly, as WOM become strong enough, the difference between pricing schemes can be negligible and the choice of pricing scheme is no longer vital to the vendor's profit. Above findings also imply that building customer feedback and interaction system could be beneficial for the vendors to overcome the potential risk of choosing a suboptimal pricing scheme.