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Pricing Data Services: Pricing by Minutes, by Gigs, or by Megabytes per Second?

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  • Ying-Ju Chen

    (School of Business and Management and School of Engineering, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)

  • Ke-Wei Huang

    (Department of Information Systems, National University of Singapore, Singapore 117417)

Abstract

Motivated by the pervasive discrepancy among the pricing schemes of data services, this paper investigates the selection of pricing metrics (variables) and the corresponding pricing plans. We construct a stylized model in which a monopoly data services seller faces heterogeneous consumers whose utilities depend on the usage and the connection speed. We examine three options for the seller to conduct the second-degree (indirect) price discrimination: by minutes, by gigabytes (Gigs), and by megabytes per second (Mbps). We show that the after-sales self-selection behaviors have a significant impact on the seller’s profitability, and it leads to a first-order influence on the pricing metric selection. We prove that either pricing by Gigs or Mbps can be optimal. Pricing by Gigs can dominate pricing by Mbps even if the consumer’s utility is more sensitive in changes in the connection speed. We also find that when incorporating the bandwidth costs or congestion costs, pricing by Mbps becomes more attractive as it allows the seller to directly control the congestion effect. These findings may help practitioners to develop their own pricing plans and pricing metrics selection.

Suggested Citation

  • Ying-Ju Chen & Ke-Wei Huang, 2016. "Pricing Data Services: Pricing by Minutes, by Gigs, or by Megabytes per Second?," Information Systems Research, INFORMS, vol. 27(3), pages 596-617.
    • Handle: RePEc:inm:orisre:v:27:y:2016:i:3:p:596-617
    DOI: 10.1287/isre.2016.0651
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