Optimal pricing for information goods with piracy and saturation effect

Optimal pricing for information goods with piracy and saturation effect

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Article ID: iaor20084243
Country: Netherlands
Volume: 176
Issue: 1
Start Page Number: 482
End Page Number: 497
Publication Date: Jan 2007
Journal: European Journal of Operational Research
Authors: ,
Keywords: marketing, decision theory
Abstract:

We analyze the pricing decision of a firm selling a product for which there is a significant and continuous saturation effect over time and that can be pirated. Assuming that the firm uses a skimming strategy, we solve three profit maximization models, given demand that is linearly decreasing in price. Few prices can be used over the life of the product. The effects of both piracy and saturation are combined in the first model. In the second model, the firm can invest in technology or copyright enforcement to reduce piracy. The third model describes the case in which piracy leads to increased awareness of the product and increased demand. Numerical sensitivity analysis and examples are used to illustrate the results. The results indicate that under strong piracy and saturation effects, a skimming strategy is suboptimal.

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