Demand Analysis and Optimal Pricing 107CUSTOMIZED PRICING AND PRODUCTS. The emergence of electronic
commerce and online transactions has greatly expanded the opportunities
for market segmentation and price discrimination. From management’s
point of view, the beauty of information goods and services is that they can
be sold over and over again (at negligible marginal cost). Moreover, unlike
a traditional good sold at a posted price from a store shelf, the price of an
information good (transacted electronically) can be changed minute by
minute, customer by customer. Sellers of sophisticated databases—from
Reuters to Lexis-Nexis to Bloomberg financial information—set scores of
different prices to different customers. As always, prices are set according to
elasticities; the most price-sensitive (elastic) customers receive the steepest
discounted prices. Consider the ways in which an airline Web site (such as
http://www.delta.com) can price its airline seats. Each time a customer enters a pos-
sible itinerary with departure and return dates, the Web page responds with
possible flights and prices. These electronic prices already reflect many fea-
tures: the class of seat, 21-day, 14-day, or 7-day advanced booking, whether a
Saturday night stay is included, and so on. By booking in advance and stay-
ing a Saturday night, pleasure travelers can take advantage of discounted
fares. Business travelers, whose itineraries are not able to meet these restric-
tions, pay much higher prices. Moreover, the airline can modify prices
instantly to reflect changes in demand. If there is a surplus of unsold dis-
count seats as the departure date approaches, the airline can further cut
their price or sell the seats as part of a vacation package (hotel stay, rentacar
included) at even a steeper discount. (Airlines also release seats to discount
sellers, such as Priceline.com, Hotwire.com, and lastminute.com, who sell
tickets at steep discounts to the most price-sensitive fliers.) Or some discount
seats might be reassigned as full-fare seats if last-minute business demand
for the flight is particularly brisk. Online, the pricing possibilities are
endless.
Closely akin to customized pricing is the practice of versioning—selling
different versions of a given information good or service. Whether it be soft-
ware, hardware, database access, or other Internet services, this typically
means a “standard” version offered at a lower price and a “professional” or
“deluxe” version at a premium price. The versions are designed and priced
to ensure that different market segments self-select with respect to the prod-
uct offerings. The inelastic demand segment eagerly elects to pay the pre-
mium price to obtain the more powerful version. The more elastic demand
segment purchases the stripped-down version at the discounted price.
Although customers may not know it, the firm’s costs for the different ver-
sions are usually indistinguishable. In this respect, versioning is closely akin
to third-degree price discrimination. In fact, some software firms begin by
designing their premium products and then simply disable key features to
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