Optimal pricing policies of web-enabled application services

Ubiquitous and inexpensive access over the World Wide Web has fueled the growth of application service providers (ASPs). ASPs are ‘service firms that provide a contractual service offering to deploy, host, manage, and lease what is typically packaged application software from a centrally managed facility.’ The application software products offered by ASPs range from standard productivity tools to expensive applications such as Enterprise Resource Planning systems like SAP or PeopleSoft. In this paper, we model the economic dynamics between the ASP and its potential customers. Under a realistic economies-of-scale assumption, we show that there exists a unique rational expectation equilibrium. Opimal pricing policies for the ASP are derived analytically and insights are demonstrated through numerical explorations.