Asymmetry in Pricing Information Goods

Abstract

Firms producing information goods that exhibit a network externality often adopt an introductory pricing strategy. The argument is that to secure a critical mass or installed base of customers, a firm sets price lower than marginal cost at the time of introducing an information good. A salient example is the web browser, Navigator, which could be freely downloaded in the early-1990s. During this period, economists identified the existence of introductory pricing strategies by firms within information good markets.¹ For example, (1996) develop a monopoly information good producer model to consider profit maximizing price setting behavior. Low initial prices are set, with price increasing later when a learning-by-doing network externality adds further benefit attracting new consumers to the market. Additionally, (1999), using a dynamic model, show that duopoly firms may choose an introductory pricing strategy.