Usage-based pricing of software services under competition

Research Article


With the emergence of high speed networks, software firms have the ability to deploy ‘software as a service’ and measure resource usage at the level of individual customers. This enables the implementation of usage-based pricing. We study both fixed and usage-based pricing schemes in a competitive setting where the firm incurs a transaction cost of monitoring usage if it implements usage-based pricing. Offering different pricing schemes helps to differentiate the firms and relax price competition, particularly at higher monitoring costs, even when competing firms offer the same service quality. However, the low usage customers acquired by offering usage-based pricing are unable to compensate for the monitoring costs incurred. This implies that managers should be cautious about implementing usage-based pricing in a competitive setting.


pricing competitive strategy game theory software industry 


  1. Bashyam, T.C.A. (1996) Service design and price competition in business information services. Unpublished PhD dissertation, UCLA.Google Scholar
  2. Dolan, R. (1987) Quantity discounts: Managerial issues and research opportunities. Marketing Science 6 (1): 1–22.CrossRefGoogle Scholar
  3. Essegaier, S., Gupta, S. and Zhang, Z.J. (2002) Pricing access services. Marketing Science 21 (2): 139–159.CrossRefGoogle Scholar
  4. Hayes, B. (1987) Competition and two-part tariffs. Journal of Business 60 (1): 41–54.CrossRefGoogle Scholar
  5. Jain, S. and Kannan, P.K. (2002) Pricing of information products on online servers: Issues, models, and analysis. Management Science 48 (9): 1123–1142.CrossRefGoogle Scholar
  6. MacKie-Mason, J. and Varian, H. (1995) Some FAQs about usage-based pricing. Computer Networks and ISDN Systems 28: 257–265.CrossRefGoogle Scholar
  7. Maskin, E. and Riley, J. (1984) Monopoly with incomplete information. The RAND Journal of Economics 15 (2): 171–196.CrossRefGoogle Scholar
  8. Nahata, B., Ostaszewski, K. and Sahoo, P. (1999) Buffet pricing. Journal of Business 72 (2): 215–228.CrossRefGoogle Scholar
  9. Oi, W. (1971) A disneyland dilemma: Two-part tariffs for a mickey mouse monopoly. Quarterly Journal of Economics 85 (1): 77–96.CrossRefGoogle Scholar
  10. Oren, S. and Smith, S. (1983) Competitive nonlinear tariffs. Journal of Economic Theory 29: 49–71.CrossRefGoogle Scholar
  11. Phillips, O. and Battalio, R. (1983) Two-part tariffs and monopoly profits when visits are variable. The Bell Journal of Economics 14 (2): 601–604.CrossRefGoogle Scholar
  12. Schmalensee, R. (1981) Monopolistic two-part pricing arrangements. The Bell Journal of Economics 12 (2): 445–466.CrossRefGoogle Scholar
  13. Sundararajan, A. (2004) Nonlinear pricing of information goods. Management Science 50 (12): 1660–1673.CrossRefGoogle Scholar
  14. Wilson, R. (1993) Nonlinear Pricing. New York: Oxford University Press.Google Scholar

Copyright information

© Palgrave Macmillan, a division of Macmillan Publishers Ltd 2010

Authors and Affiliations

  1. 1.ISB CampusGachibowli, HyderabadIndia

Personalised recommendations