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Sampling Information Goods: How much Should be Free?


Halbheer, D; Stahl, F; Koenigsberg, O; Lehmann, D R (2010). Sampling Information Goods: How much Should be Free? In: INFORMS Marketing Science Conference 2010, Cologne, Germany, 16 June 2010 - 19 June 2010.

Abstract

One of the major impacts of the Internet has been the vast increase in the amount of information that became available "for free". The provision of free information, or more specifically how much information to give away for free as a viable business model, has puzzled many observers as well as managers. To study this problem, we address two related questions: First, what portion of the information good should be offered as a free sample? Second, how much should a firm charge for the full version? To address these questions, we develop an analytical model, in which a firm offers both a full version and a free sample, on which it earns advertising revenues. Taking into account customers' initial valuation (willingness-to-pay) and their experienced quality with the free version, we characterize the optimal sample portion that should be offered for free and the price of the paid version. For both cases where either free sampling aims to persuade all consumers to buy or only those with high willingness-to-pay, we find that is optimal for the firm to offer a larger free sample when customers underestimate product quality. Our model assumptions and results are generally consistent with an empirical analysis of actual firm data on the market for news. Next, we compare the models’ implications with managerial decisions and show that managers have a tendency to underestimate the impact of free samples when consumers will use them extensively in updating their expectations about product quality.

Abstract

One of the major impacts of the Internet has been the vast increase in the amount of information that became available "for free". The provision of free information, or more specifically how much information to give away for free as a viable business model, has puzzled many observers as well as managers. To study this problem, we address two related questions: First, what portion of the information good should be offered as a free sample? Second, how much should a firm charge for the full version? To address these questions, we develop an analytical model, in which a firm offers both a full version and a free sample, on which it earns advertising revenues. Taking into account customers' initial valuation (willingness-to-pay) and their experienced quality with the free version, we characterize the optimal sample portion that should be offered for free and the price of the paid version. For both cases where either free sampling aims to persuade all consumers to buy or only those with high willingness-to-pay, we find that is optimal for the firm to offer a larger free sample when customers underestimate product quality. Our model assumptions and results are generally consistent with an empirical analysis of actual firm data on the market for news. Next, we compare the models’ implications with managerial decisions and show that managers have a tendency to underestimate the impact of free samples when consumers will use them extensively in updating their expectations about product quality.

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Additional indexing

Item Type:Conference or Workshop Item (Paper), refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Event End Date:19 June 2010
Deposited On:05 Jan 2011 17:32
Last Modified:07 Apr 2017 16:38
Free access at:Official URL. An embargo period may apply.
Official URL:http://www.marketingscience2010.uni-koeln.de

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