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

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Oh, Jungsuk
Issue Date
College of Business Administration (경영대학)
Seoul Journal of Business Vol13(2): 3~33(2007)
fixed pricingusage-based pricingprofit sharing rule
One of the core debates of the online economy has been whether a
fixed, one-time access fee or a usage-dependent fee would yield greater
return 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 to
be considered in designing an optimal pricing strategy for an online
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.
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College of Business Administration/Business School (경영대학/대학원)Dept. of Business Administration (경영학과)Seoul Journal of BusinessSeoul Journal of Business Volume 13, Number 1/2 (2007)
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