Wednesday, September 3, 2008

Nynex - ProCD - Digital Directory Assistance Bertrand Pricing War

Just scribbling down this story since I thought it was a good one. Professor Erik Brynjolfsson cited it as an example of Bertrand pricing in our Economics of Information class today.

In 1986, Nynex was creating directories on disk and selling them to companies for approximately 10,000 apiece. A Nynex employee thought this was a pretty good business, so he hired a consultant to start his own business doing it (ProCD). Apparently, the consultant thought it was was a good idea too, so he created Digital Directory Assistance to do the same thing.

Pretty soon, a bidding war broke out with the firms competing on price. This, as Bertrand posits, drove the price down to roughly marginal cost, meaning everyone was pretty much out of luck. Now of course, this info is free on the web.

It's a good illustration of how generally digital information products have high fixed costs and low marginal costs, driving many of the prices towards zero unless there's some type of barrier to entry such as intellectual property.

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