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Not a personal finance question per se but regarding finance and money - The type of economy and content Chris Anderson writes about in Long Tail and Free, essentially defined by close to zero marginal cost, does there exist models for optimal pricing when supply is infinite?

Probably this is a sort of economic game theory question, is there a StackExchange for that even? Chris Anderson is suggesting mainly freemium models and similar, but just working with price, what is the best one can achieve? I'm considering a sort of tiered pricing model, but I'm very much a layman in the field so am appealing for you to enlighten me.

Thanks!

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  • Seems more like a question for joel's Business of Software forums
    – Jon S
    Dec 13, 2010 at 15:50
  • In an efficient market, in the long term, the price of an item is the same as its marginal cost. So . . . Linux anyone? :)
    – user296
    Dec 13, 2010 at 23:05
  • There is a proposal for an Economics stack exchange where this would be right on target.
    – poolie
    Dec 14, 2010 at 22:43
  • I will come back and pick an answer to this question soon, thanks for all your great attention, very much like what I was looking for!
    – HiQ CJ
    Jan 4, 2011 at 17:40

3 Answers 3

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With near zero marginal cost, and infinite supply, your prices are going to be decided by entry cost, competition, and what the market will bear.

Generally speaking, though, there are no accurate models for getting these kinds of optimal prices in advance - your best bet is to test, experiment, and then build a business and market specific model based on what you observe.

Look at the Steam network, as an example. They are in the business of selling 0 marginal cost software (games), in a market with a significant but quickly decreasing entry cost, and with solid competition. Despite being around for years in a mature market, they're still discovering unexpected optimal price points when testing how their customers behave.

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  • Well.... it's not really zero marginal cost. Not that it's super-expensive, either, but those servers that send you the files aren't completely free. :)
    – user296
    Dec 13, 2010 at 23:02
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It seems this will be very much driven by price discrimination. If there are some customers who will pay up to $100, sell at that; and if there are others who'll pay $1 sell at that price.

For instance you see computer games, which have zero marginal cost of production, sold at "normal new release" prices, at premium prices with a special box or doo-dad, and at discount prices once the game is a bit old.

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Software or any online service fits this category I suppose. There are two apps I pay for that are "free." Evernote and Pandora. Evernote is free for 40MB, $45/yr for 500MB/mo transfer. Pandora is free for 40hrs/mo, $36/yr unlimited.

When I use a free product and hit the limit it's a sign to me that I value that product and the owners deserve to get paid. To me, both products provide value that's well above the cost they are asking. In this case, both products are annual subscriptions, but offer monthly as well.

You don't mention the type of product you have, the two I listed are similar in billing type, but very difference end uses. The question is - How do you provide value and make your customers want to pay you? BTW - the ~$40/yr give or take, seems a good price point. Under $50, it feels a fair price to pay for a useful product.

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