The optimal number of versions : why does goldilocks pricing work for information goods ?

Wan Yee Wendy HUI, Byungjoon Yoo, Kar Yan TAM

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

14 Citations (Scopus)

Abstract

The literature in general suggests that selling multiple versions is more profitable than selling only a single version. However, how many versions should be offered is not as clear. Classical pricing studies suggest providing as many versions as the number of customer types, whereas some studies in information systems suggest providing only one or two versions. In reality, firms typically provide more than one or two versions, such as three in the case of Goldilocks pricing. This study explains the discrepancies in these results and observations by showing that, although profit increases with more versions, the marginal benefit of an additional version decreases rapidly. Therefore, firms sell few versions even in the presence of very small versioning-related costs such as menu and cognitive costs. This study analyzes the effects of these costs, and shows that cognitive costs have more profound effects on versioning than menu costs.
Original languageEnglish
Pages (from-to)167-191
Number of pages25
JournalJournal of Management Information Systems
Volume24
Issue number3
DOIs
Publication statusPublished - 2007
Externally publishedYes

Fingerprint

Costs
Sales
Pricing
Profitability
Information systems
Versioning
Menu costs
Menu
Discrepancy
Profit

Keywords

  • versioning
  • pricing
  • information goods pricing
  • economics of information systems
  • customized bundling
  • analytical modeling

Cite this

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title = "The optimal number of versions : why does goldilocks pricing work for information goods ?",
abstract = "The literature in general suggests that selling multiple versions is more profitable than selling only a single version. However, how many versions should be offered is not as clear. Classical pricing studies suggest providing as many versions as the number of customer types, whereas some studies in information systems suggest providing only one or two versions. In reality, firms typically provide more than one or two versions, such as three in the case of Goldilocks pricing. This study explains the discrepancies in these results and observations by showing that, although profit increases with more versions, the marginal benefit of an additional version decreases rapidly. Therefore, firms sell few versions even in the presence of very small versioning-related costs such as menu and cognitive costs. This study analyzes the effects of these costs, and shows that cognitive costs have more profound effects on versioning than menu costs.",
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The optimal number of versions : why does goldilocks pricing work for information goods ? / HUI, Wan Yee Wendy; Yoo, Byungjoon; TAM, Kar Yan.

In: Journal of Management Information Systems, Vol. 24, No. 3, 2007, p. 167-191.

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

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