STATISTICAL AGGREGATION OF INFORMATION GOODS:
NEW STRATEGIES FOR THE DIGITAL ECONOMY

Yannis Bakos (University of California, Irvine)
and Erik Brynjolfsson (MIT and Stanford University)
March 1997

ABSTRACT We analyze pricing strategies for digital information
goods, such as those increasingly available via the Internet.
Because perfect copies of such goods can be created and distributed
almost costlessly, any single positive price for copies is likely
to be socially inefficient. However, we show that, under certain
conditions, a monopolist who first aggregates the goods in certain
ways may nearly eliminate this inefficiency while simultaneously
increasing profits. In particular, site licensing, bundling and
subscription pricing can be analyzed as aggregating consumer utility
across different consumers, different goods, or different time
periods. The benefits of this approach are derived from novel
applications of the law for large numbers and can be viewed as a
generalization of our earlier work on bundling (Bakos and
Brynjolfsson 1997). The increased profits and efficiency from
aggregation are particularly significant when the marginal cost
of the goods is zero or near zero, as is the case with many digital
information goods services. For goods with significant marginal
cost, a disaggregation strategy, possibly requiring "micropayments,"
will typically be optimal. We also show that offering the goods
both in the aggregated package and separately will generally
dominate either a strategy of pure aggregation or pure disaggregation
if consumers are heterogeneous in their propensity to spend on the
goods and if the cost of administering multiple prices is not too
large. We derive analytically the optimal degree of aggregation
as a function of these parameters and provide several numerical and
graphical examples. Goods with significant marginal cost or with
heterogeneous consumers are sometimes aggregated for technological
reasons, such as economies of scale in distribution or disbursement.
In these cases, electronic distribution and micropayments may
allow individual pricing and distribution, promoting a
disaggregation strategy. Finally, we show how private incentives
for aggregation can diverge from social incentives and how the
profitability of bundling strategies can create a "winner-take-all"
equilibrium even in the absence of technological economies of scale,
scope, or network externalities. The predictions of our analysis
appear to be consistent with empirical observations in the markets
for many types of Internet and on-line content, cable television
programming, and copyrighted music and have important implications
for the regulation of electronic commerce and antitrust policy
generally.

References Bakos, Y. and Brynjolfsson, E.
"Bundling Information Goods: Pricing, Profits and Efficiency".
Working Paper, MIT Center for Coordination Science, January 1997.
Available from http://www.gsm.uci.edu/~bakos/big/big96-12.htmlor
http://www.gsm.uci.edu/~bakos/big96-12.pdf(in pdf format).