Bundling information goods: Theory and evidence

Information goods are characterized by low marginal costs and high fixed costs of production. Pricing at marginal costs will not recover the first copy costs. Electronic access creates opportunities to deal with this problem. Advances in digital communication technologies and decreasing hardware costs have enabled producers of digital content to engage in new product bundling and non-linear pricing schemes. These pricing schemes allow producers to extract more value from heterogeneous users to cover the fixed costs of production. This dissertation examines three topics in the economics of bundling information goods. Chapter I reviews the bundling literature. Chapter II introduces "generalized subscriptions", a new bundling option that allows users to construct customized sub-bundles by selecting articles from across the collection. The analysis compares six different pricing strategies: sales of individual articles, sales of traditional subscriptions, sales of generalized subscriptions, and combinations of these pure strategies. The merits of the different pricing schemes depend heavily on the distribution of consumer values and the level of costs. Chapter III analyzes the bundling problem when the value of each article is uncertain at the time the purchase is made. By prepaying a fee, the generalized subscription allows the consumer to obtain more information before committing to which particular articles he will purchase. The analysis explores how the producer incentives to bundle change when the consumers exhibit risk aversion. Chapter IV analyzes the empirical evidence from the PEAK field trial. PEAK is a large-scale electronic pricing trial. The University of Michigan provided Internet-based delivery of Elsevier content to users at multiple campuses and commercial entities. We found that, while there is a steep initial learning curve, decision makers rapidly develop an understanding of innovative pricing schemes. We also have found that the more flexible generalized subscription option effectively provided user communities with easier access to a larger body of content than they previously had available. Finally, we have gathered substantial empirical evidence demonstrating the extent to which user costs and consumer heterogeneity have a significant impact on the demand for electronic access.