Electronic Commerce
Product Choice and Discriminatory
Pricing
Product differentiation
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Differentiated goods

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Different goods

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MS Word vs. cereal
Complement effect?
Horizontal differentiation
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MS Word vs. WordPerfect
Competition/substitution effect
Differences based on appearance and taste
Vertical differentiation

Most customers agree that one is better than the
others in quality if their prices are the same.
A case of horizontal differentiation—
Hotelling’s location competition
The evolutionary ending?
Price discrimination
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First-order discrimination
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Second-order discrimination
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Different prices enforced by the seller through
natural/visible signals
Product-and-buyer matching
Different prices self-enforced by the buyers in the
way of self-selection
Incentive compatibility (intrinsic)
Full discrimination


Charged by marginal utility individually
High differentiation costs
Incentive to differentiation

Chamberlinian monopolistic competition

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As long as there is no entry barrier, the
process of offering slightly additional
difference to exploit the more profit
opportunity will result in zero-profit for all
competitive firms.
Segmentation targeting positioning &
differentiation
Struggling against commoditization
Pricing discrimination in
Internet commerce

Gaining the customer preference
through surfing/purchasing behavior
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Privacy problems
Customization without/with low
additional costs
Billing independently

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Negotiable possibility
Bargaining openly (many participants)
Bargaining secretly (few participants)
Possibility of customization
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The knowledge of what a buyer wants
The ability of product transmutation
The degree of digitalization
Reduce customer arbitrage (the possibility
of redistribution)
Reduce waste (lean/flexible production)
The feasibility of price discrimination
Use of user information

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Obtaining identifiable information for the
prospective buyer
Primary customer information

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Data collected form transactions directly
Secondary customer information

Data derived from cross-reference/matching
Identifiable customer
information (Equifax.com)
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Identity information
Employment data
Credit history
Public record information
Credit inquiry information
Privacy and anonymity

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Web access log and cookies
Anonymity as a myth

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Protection by the privacy law

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Traceable back to the originator technically
Use by permission
Authentication by the trusted third party
Market approaches

Incentive for voluntarily-revealing information
Pricing digital products

Standard U-shaped cost structure
Different pricing situations
Pricing by quality choice
Marginal cost curve
for accuracy
Not quantity
Pricing discrimination by
quality
Incentive compatible pricing
mechanism
Selling vs. renting

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If the product value is much less than
the cost of the product, no one will be
willing to purchase it.
The club goods (between private goods
and public goods)
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Buying collectively and consumption by
renting
Pricing by bundling

Packing two or more products and selling the
bundle in fixed proportions.

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If the components of a bundle are also sold
individually, we called this a mixed bundling
strategy.
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Quantity-depended pricing: more discount for larger
bundle (Pure bundling strategy)
Microsoft’s Office bundle: Word, Excel, Access, …
Tie-in: a bundle with some value primaries and
some adjustable minors.
Incentive compatibility in
education market
Magnitude of Effort
High-talented students
Low-talented students
Wage L
Wage H
Education level
A separating wage scheme

The employer expects an equilibrium
state that high-talented interviewee
with a higher education level is paid by
a higher payment in contrast to the
low-talented one with a lower education
level is paid lower.
Spence’s educational signaling
model (separate equilibrium)
w(y)
Low-talented guys
w(y)
High-talented guys
C1=a1y
C2=a2y
2
2
B'
B*
1
1
B"
B"
0
y
y
0
Y*
Y*
Education level
生產力低者求學的成本高
(a1>a2),B=W-C,B">B'(低生產力者),B*>B"(高生產力者),
則高生產力者高學歷Y*,低生產力者低學歷0,區隔成功.
The first confusing situation
emerges


If the employer experienced many loweducated employees performing very
well, he may switch to pay an average
wage between high- and low-talented
employees when he faced a loweducated interviewee.
The proportion of low-talented
employees : q1
Spence’s educational signaling
model (mix equilibrium)
w(y)
Low-talented guys
w(y)
High-talented guys
C1=a1y
C2=a2y
2
2-q1
1
2
B'
2-q1
1
B"
y
B*
B"
y
0
Y*
Y*
生產力低者求學的成本高(a1>a2),B=W-C,B">B'(低生產力者),B*<B"
(高生產力者),則低生產力者低學歷0,高生產力者並不拿學歷者,區隔不成功.
大家都不去受教育了.若q1越大,則高生產力者越會去拿學位.
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The second confusing
situation emerges


If the employer faced too many higheducated interviewees, he may switch
to pay those who obtained higher
degree an average wage between highand low-talented employees unless they
got a lower degree education.
The proportion of low-talented
employees : q1
Spence’s educational signaling
model (mix equilibrium)
w(y)
Low-talented guys
High-talented guys
w(y)
C1=a1y
2
2-q1
1
C2=a2y
2
2-q1
B'
B*
1
B"
B"
y
y
0
Y*
Y*
生產力低者求學的成本高(a1>a2),B=W-C,B"<B'(低生產力者),B*>B"
(高生產力者),則高低生產力者都拿學歷Y*,即使獲得平均報酬,
因此區隔不成功.所以,若a1越小,或是Y*太小,都將驅使低生產力者也去拿學位.
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