Behavioural economics of digital content

Increased use of the Internet for the distribution of digital products allows firms to embrace new business models. These models provide higher levels of product customization. In search of a better match between products and consumers’ willingness to pay, many online and mobile content providers have recently started to add new charging methods to their existing pricing strategies. Currently, a gap exists between a firm’s decision to implement a pricing mechanism and the firm’s consideration of consumers’ behavior towards acceptance of that pricing mechanism. What can firms do to better align their revenue models with consumers’ behavioral norms? If an answer exists, and we will offer one, it will directly relate to the design, implementation and pricing of information goods. From the point of view of an online content provider this paper examines implications of one of the many types of consumers’ economic anomalies: mental accounting (MA). More specifically, we look at how mental accounting (MA) of payment for and consumption of digital content at the consumer level impacts firm level choices of pricing strategies. Our results show that MA of payments and consumptions change firms’ pricing strategy for digital content. For the firm which has high digital content customization level, pay-per-use and pay-later strategies are always inferior to subscription. In contrast, under neoclassical assumptions, firms are equally well-off from employing any price scheme. Our results also show that in a duopolistic market for information goods, firms must be knowledgeable of MA’s influence on the market. MA’s influence is magnified if the level of customization is a further differentiating factor. We present general conditions under which profits increase with the intensity of MA. Also, our results offer insights into the choice of pricing schemes by content distribution networks as well as mobile service providers and may provide an explanation as to how economic and behavioral aspects of digital consumption may interact.