Fixed vs. Usage-Based Pricing: Choice of Pricing Schemes and Optimal Profit Allocation in the Online Content Industry

Abstract

One of the core debates of the online economy has been whether afixed, one-time access fee or a usage-dependent fee would yield greaterreturn for each player of the online economy. This paper develops a simple model of the online economy consisting of a single Content Provider (CP) and a single Network Provider (NP) in order to provide an insight to this issue. Three characteristics related to the type of content are identified as major determinants of level of demand; marginal utility of a unit content consumption for the marginal consumer, concavity of utility functions, and denseness of type distribution. Higher utility of consumption, coupled with less dense type distribution, leads to price insensitivity of the demand function in terms of number of subscribers. However, a highly concave utility function is required for price insensitivity of consumer consumption amount. These content characteristics need tobe considered in designing an optimal pricing strategy for an online player.A numerical example illustrates that all fixed pricing might not be optimal, not only for the purpose of social welfare maximization, but also for the purpose of consumers surplus maximization. It also highlights the importance of the profit sharing rule in order for a price alliance to be reached.