Essays on Internet markets and information goods

Abstract

(cont.) provides explanations as to when and how incorporating them into advertising deals can be profitable. We argue that using these pricing models appropriately can give both the publisher and the advertiser proper incentives to make non-contractible efforts that may improve the effectiveness of advertising campaigns. It also allows the publisher and the advertiser to share the risk caused by uncertainty in the product market. We show that key factors that influence the use of performance-based pricing models are the importance of the publisher's incremental efforts, precision of click-through measurement, uncertainty in the product market, and risk aversion parameters. We also clarify issues that are being debated in the industry, such as how the importance of the advertiser's incremental efforts and existence of non-immediate purchases affect the use of performance-based pricing models. The third essay, "Renting versus Selling Durable Information Goods", studies whether a monopoly producer of a durable information good should sell or rent its good to consumers. We study whether the producer obtains a higher profit under a selling strategy or a renting strategy. Our analysis shows that the conventional wisdom that a durable good monopolist would always prefer renting to selling is no longer valid in the context of durable information goods, because of the existence of "individual depreciation". We find that a renting strategy leads to a higher producer surplus than a selling strategy does, when this individual depreciation parameter is high, i.e., the utility a durable information good provides to consumers decreases relatively ...

This dissertation consists of three essays on Internet markets and information goods. The first essay, "Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety at Online Booksellers", presents a framework and empirical estimates that quantify the economic impact of increased product variety made available through electronic markets. While efficiency gains from increased competition significantly enhance consumer surplus, for instance by leading to lower average selling prices, our present research shows that increased product variety made available through electronic markets can be a significantly larger source of consumer surplus gains. One reason for increased product variety on the Internet is the ability of online retailers to catalog, recommend and provide a large number of products for sale. For example, the number of book titles available at Amazon.com is over 23 times larger than the number of books on the shelves of a typical Barnes & Noble superstore and 57 times greater than the number of books stocked in a typical large independent bookstore. Our analysis indicates that the increased product variety of online bookstores enhanced consumer welfare by $731 million to $1.03 billion in the year 2000, which is between seven to ten times as large as the consumer welfare gain from increased competition and lower prices in this market. There may also be large welfare gains in other SKU-intensive consumer goods such as music, movies, consumer electronics, and computer software and hardware. The second essay, "Performance-based Pricing Models in Online Advertising", applies the economic theory of incentive contracts to the study of performance-based pricing models in online advertising and provides