ESSAYS ON DYNAMIC PRICING AND BUNDLING IN SUBSCRIPTION MARKETS

This dissertation consists of two essays that investigate dynamic pricing and bundling strategies in subscription markets. In the first essay, we analyze the dynamic price discrimination strategies of a monopolist offering new services on a subscription basis. In subscription markets, the pricing policy can be based on customers’ past purchase behavior (behavioral price discrimination) and time of purchase (intertemporal price discrimination). In the presence of uncertainty regarding the value of new features and heterogeneity in consumer valuations of the existing features, we investigate the profits and rate of adoption of new technology that can be achieved with each pricing strategy. When the prior heterogeneity in consumer valuation of the existing features is relatively large, the monopolist can improve his profits by committing to ignore consumer past behavior and varying prices based only on time. We also study the role of commitment power of the monopolist to announce future prices and correlation in valuations of the new and existing features. In the second essay, we investigate the multi-product pricing strategies of a sequentially innovating monopolist introducing new services. The new service can either represent a new functionality not directly related to the existing service or an enhancement to the existing services. When the existing service is offered in multiple versions, the monopolist can sell the new service separately or bundle the new service with some or all versions of the primary service. We analyze two pricing strategies that represent the two extremes of a spectrum of bundling strategies that a monopolist offering such services can practice: Discriminative Bundling (DB) and Independent Pricing (IP). Using the discriminative bundling (DB) strategy, a service provider offering multiple versions of the primary service bundles the new service only with higher versions of the primary service while selling it separately to remaining customers. Using the independent pricing strategy (IP), the service provider offers the new service separately to all consumers including those buying lower and higher end versions. We find that the comparison of the two strategies in terms of profits depends on the nature of the new service and the general distribution of consumer valuations for the new and the primary services.