The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Pricing Services Online, Economics of

  • Anja Lambrecht
Reference work entry


Firms deliver a variety of services online, ranging from content, software and banking to entertainment and networking. This article examines a firm’s pricing decision for online services. It first discusses how a firm’s decision of pricing services online differs from offline pricing decisions. It then discusses how firms can price services online. It examines the firm’s choice between ‘fee’ or ‘free’ revenue models. It then turns to a firm’s decision on its pricing structure. This includes the decision whether to sell or to rent, and the choice between pricing plans (e.g. pay-per-use, flat-rate tariffs or more complicated multi-part tariffs) or bundling. Lastly, it turns to the role of pricing in new product adoption.

This is a preview of subscription content, log in to check access.



The author thanks Gregory Crawford and Bernd Skiera for their comments.


  1. Ascarza, E., A. Lambrecht, and N.J. Vilcassim. 2012. When talk is ‘free’: An analysis of subscriber behavior under two- and three-part tariffs. Journal of Marketing Research 49(6): 882–899.CrossRefGoogle Scholar
  2. Athey, S., E. Calvano, and J.S. Gans. 2013. The impact of the Internet on advertising markets for news media, Working paper. Cambridge, MA: National Bureau of Economic Research.CrossRefGoogle Scholar
  3. Bagh, A., and H.K. Bhargava. 2013. How to price discriminate when tariff size matters. Marketing Science 32: 111–126.CrossRefGoogle Scholar
  4. Bakos, Y., and E. Brynjolfsson. 1999. Bundling information goods: Pricing, profits and efficiency. Management Science 45(12): 1613–1630.CrossRefGoogle Scholar
  5. Bakos, Y., and E. Brynjolfsson. 2000. Bundling and competition on the Internet. Marketing Science 19(1): 63–82.CrossRefGoogle Scholar
  6. Bawa, K., and R. Shoemaker. 2004. The effects of free sample promotions on incremental brand sales. Marketing Science 23(3): 345–363.CrossRefGoogle Scholar
  7. Bhargava, H.K., and V. Choudhary. 2001. Information goods and vertical differentiation. Journal of Management Information Systems 18(2): 89–106.CrossRefGoogle Scholar
  8. Boom, A. 2010. ‘Download for free’- when do providers of digital goods offer free samples?. Working paper.Google Scholar
  9. Chiou, L. and C. Tucker. 2011. Paywalls and the demand for news. Working paper.Google Scholar
  10. Crawford, G. 2008. The discriminatory incentives to bundle: The case of cable television. Quantitative Marketing & Economics 6(1): 41–78.CrossRefGoogle Scholar
  11. DellaVigna, S., and U. Malmendier. 2006. Paying not to go to the gym. American Economic Review 96: 694–719.CrossRefGoogle Scholar
  12. Edelman, B. 2009. Priced and unpriced online markets. Journal of Economic Perspectives 23(3): 21–36.CrossRefGoogle Scholar
  13. Fang, H., and P. Norman. 2006. To bundle or not to bundle. Rand Journal of Economics 37(4): 946–963.CrossRefGoogle Scholar
  14. Godes, D., E. Ofek, and M. Sarvary. 2009. Content vs. advertising: The impact of competition on media firm strategy. Marketing Science 28(1): 20–35.CrossRefGoogle Scholar
  15. Grubb, M. and M. Osborne. 2012. Cellular service demand: Biased beliefs, learning, and bill shock. MIT Sloan Research Paper No. 4974– 12. Chestnut Hill: Boston College, Department of Economics.Google Scholar
  16. Halbheer, D., F. Stahl, O. Koenigsberg, and D.R. Lehmann. 2013. Digital content strategies. Columbia Business School Research Paper No. 11–8. Zürich Univ., Inst. für Betriebswirtschaftslehre.Google Scholar
  17. Iyengar, R., A. Ansari, and S. Gupta. 2007. A model of consumer learning for service quality and usage. Journal of Marketing Research 44(4): 529–544.CrossRefGoogle Scholar
  18. Iyengar, R., K. Jedidi, S. Essegaier, and P.J. Danaher. 2011. The impact of tariff structure on customer retention, usage and profitability of access services. Marketing Science 30(5): 820–836.CrossRefGoogle Scholar
  19. Jensen, S. 2006. Implementation of competitive nonlinear pricing: Tariffs with inclusive consumption. Review of Economic Design 10: 9–29.CrossRefGoogle Scholar
  20. Klemperer, P. 1987. Markets with consumer switching costs. Quarterly Journal of Economics 102(2): 375–394.CrossRefGoogle Scholar
  21. Kridel, D.J., D.E. Lehman, and D.L. Weisman. 1993. Option value, telecommunication demand, and policy. Information Economics and Policy 5: 125–144.CrossRefGoogle Scholar
  22. Lambrecht, A. and Misra, K. 2012. Pricing online content: Fee or free?. Working paper.Google Scholar
  23. Lambrecht, A., and B. Skiera. 2006. Paying too much and being happy about it: Existence, causes and consequences of tariff-choice biases. Journal of Marketing Research 43(May): 212–223.CrossRefGoogle Scholar
  24. Lambrecht, A., and C. Tucker. 2012. Paying with money or with effort: Pricing when customers anticipate hassle. Journal of Marketing Research 49: 66–82.CrossRefGoogle Scholar
  25. Lambrecht, A. and C. Tucker. 2013. When does retargeting work? Information specificity in online advertising. Working paper.Google Scholar
  26. Lambrecht, A., K. Seim, and B. Skiera. 2007. Does uncertainty matter? Consumer behavior under three-part tariffs. Marketing Science 26(5): 698–710.CrossRefGoogle Scholar
  27. Lambrecht, A., K. Seim, N. Vilcassim, A. Cheema, Y. Chen, G.S. Crawford, K. Hosanagar, R. Iyengar, O. Koenigsberg, R. Lee, E.J. Miravete, and O. Sahin. 2012. Price discrimination in service industries. Marketing Letters 23: 423–438.CrossRefGoogle Scholar
  28. Levinson, D., and A. Odlyzko. 2008. Too expensive to meter: The influence of transaction costs in transportation and communication. Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences 366(1872): 2033–2046.CrossRefGoogle Scholar
  29. Odlyzko, A. 2001. Internet pricing and the history of communications. Computer Networks 36: 493–517.CrossRefGoogle Scholar
  30. Oi, W.Y. 1971. A Disneyland dilemma: Two-part tariffs for a Mickey Mouse monopoly. Quarterly Journal of Economics 85: 77–96.CrossRefGoogle Scholar
  31. Olderog, T., and B. Skiera. 2000. The benefits of bundling strategies. Schmalenbach Business Review 1(2): 137–160.CrossRefGoogle Scholar
  32. Pauwels, K. and A. Weiss. 2007. Moving from free to fee: How marketing can stimulate gains and stem losses for an online content provider. Journal of Marketing, 72(3)Google Scholar
  33. Prasad, A., V. Mahajan, and B. Bronnenberg. 2003. Advertising versus pay-per-view in electronic media. International Journal of Research in Marketing 20: 13–30.CrossRefGoogle Scholar
  34. Prelec, D., and G. Loewenstein. 1998. The red and the black: Mental accounting of savings and debt. Marketing Science 17(1): 4–28.CrossRefGoogle Scholar
  35. Rao, A. 2011. Online content pricing: Purchase and rental markets. Working paper.Google Scholar
  36. Schlereth, C., and B. Skiera. 2012. Measurement of consumer preferences for bucket pricing plans with different service attributes. International Journal of Research in Marketing 29(2): 167–180.CrossRefGoogle Scholar
  37. Schmalensee, R. 1981. Monopolistic two-part tariff arrangements. Bell Journal of Economics 25: 445–466.CrossRefGoogle Scholar
  38. Shampanier, K., N. Mazar, and D. Ariely. 2007. Zero as a special price: The true value of free products. Marketing Science 26(6): 745–757.CrossRefGoogle Scholar
  39. Shapiro, C., and H.H. Varian. 1998. Versioning: The smart way to sell information. Harvard Business Review 76: 106–114.Google Scholar
  40. Sun, M. and F. Zhu. 2012. Ad revenue and content commercialization: Evidence from blogs. Management Science, 59: 2314–2331, Published online ahead of print April 4, 2013.Google Scholar
  41. Tirole, J. 1988. The theory of industrial organization. Cambridge, MA: MIT Press.Google Scholar
  42. Train, K.E., D.L. McFadden, and M. Ben-Akiva. 1987. The demand for local telephone service: A fully discrete model of residential calling patterns and service choices. Rand Journal of Economics 18(1): 109–123.CrossRefGoogle Scholar
  43. Wilson, R. 1993. Nonlinear pricing. New York: Oxford University Press.Google Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Anja Lambrecht
    • 1
  1. 1.