GEOGRAPHIC INFORMATION: Value, Pricing, Production, and Consumption - Chapter 4

chapter four Pricing information: The interaction of mechanism and policy 4.1 Pricing theories The examples provided in Chapter 3 illustrate that in recent years the pricing of information and information technology goods has been subject to consid-erable volatility. This section explores the extent to which prevailing theories of pricing can help explain the examples covered in previous sections. The first area of theory, known as price discrimination, addresses how prices can be set given a demand from a segmented market, and is categorized in three sections based on the original definition by Pigou in 1932 (Wikipedia, 2006). 4.1.1 First-degree price discrimination First-degree price discrimination is where the producer sells the same goods to different market segments at different prices. The determinant is the abil-ity or willingness of the customer to pay a price (Dedeke, 2002). For example, IGN Belgium* sells its topographic data at the scale of 1:10,000 for differ-ent prices, depending on the type of area**: rural areas cost half the price of urban areas; i.e., in the 2006 price list, from 10 to 40 euro per square kilometer in rural areas (depending upon area size purchased), compared to 20 to 80 euro for urban areas. The selling of cars has classically been a first-degree pricing process. There is an advertised or recommended price from which discounts are given for large fleet purchasers or selectively for individual customers through trade-in discounts and special offers. The opaque nature of new car pricing has historically made it difficult for potential purchasers to effectively discriminate between vendors. Such customer uncertainty has now encouraged some manufacturers to move from variable to fixed pricing. However, this also can generate problems, as when U.S. car manufacturer Ford announced a “clear pricing strategy”; what was meant to say “‘Here’s a justifiable and reasonable price’ can come across in ads as ‘Hey, we won’t rip you off this time!’” (Mahoney, 2006). * http://www.ngi.be/. ** http://www.ngi.be/FR/FR1-5-1-1.shtm. 95 ` 2008 by Taylor & Francis Group, LLC 96 Geographic Information: Value, Pricing, Production, and Consumption 4.1.2 Second-degree price discrimination Second-degree discrimination focuses more on volume discounts, but where the volume prices are the same for all (Varian, 1996). The range of prices in the IGN Belgium example above also demonstrates second-degree price discrimination. The greater the geographical area for which you purchase data, the lower is the price per square kilometer, e.g., the cost for urban data declines from 80 euro per square kilometer for coverage up to 20 square kilo-meters to 20 euro per square kilometer for coverage in excess of 100 square kilometers. Dedeke splits this category further into three subcategories. First, is the conventional volume discount approach. The second is features-based, for example, where there is “deactivation of several functions of a software prod-uct that is being sold to a special category of customers” (Dedeke, 2002). This is frequently used in commercial software packages and information ser-vices, including geographic information systems (GISs) and GI-based online information services. A reduced subset of a product or service is made avail-able free of charge, which the vendors hope will then encourage people to pay for the full-service product. U.K. householders can use no-cost, partly deactivated services to check for potential flood risk, possible pollution risks, and the value of nearby properties using services such as Landmark (2003b), Sitescope (2003), Nethouseprices* (2005), and even the U.K. Environment Agency** (Environment, 2003). Dedeke’s third category of price discrimination is the time-based approach, for example, where a video shop charges more for a new release DVD than for an old film. The best example of this in the GI world is access to meteorological data from those government agencies who do charge for such information, for example, the U.K. Met Office. Under special arrangements, much raw meteorological observations data is available for free (for noncom-mercial use, cost of distribution only), mainly for education and research, once a certain period has passed, which may vary from 24 hours to days or weeks. The point is that the most valuable weather data are used for imme-diate and short-term forecasting, for which there exists a proven and very active marketplace, e.g., a 1-year license to use the U.K. Met Office national 24-hour forecast on a single website cost £515 in 2007.*** A geographical variant of this type of price discrimination is where flat rates are charged for a service irrespective of the distance covered, but there is a volume discount. The one-price charge by Amazon.co.uk for delivery * See Benedictus (2005) for a discussion of the possible privacy implications of the ready availability of property prices and details. ** This example brings into focus the issue, discussed elsewhere in the chapter, of whether the launch of a commercial service by a government agency is unfair com-petition against services provided in the commercial sector. Note also the similarity between this example and the weather data debate, noted earlier, in the U.S. ***http://www.metoffice.gov.uk/newmedia/datafeed/catalogue.html. ` 2008 by Taylor & Francis Group, LLC Chapter four: Pricing Information 97 means that the same price is paid by customers whether they live next to the Amazon warehouse that dispatches their order or 600 kilometers away in the north of Scotland. The flat rate is varied depending on the amount purchased and whether a faster delivery mode is selected, but the resulting charge is still the same irrespective of distance. The Amazon pricing model for product dispatch combines a form of fixed-price universal service for sending an order to a customer who has selected the products online, where Amazon benefits from the “connectivity and low transaction latency” of the Internet (Odlyzko, 2004, p. 341). 4.1.3 Third-degree price discrimination Third-degree discrimination focuses more on the ability of market segments to pay, discriminating, for example, between low-ability groups such as elderly people and students, and high-ability groups such as the urban afflu-ent. That means the U.K. Met Office, Britain’s government meteorological agency, continues to provide weather data for the public good (the traditional weather forecast is in the public commons*), but the Met Office then has a series of commercially available value-added services that are targeted at specific sectors. For example, forecasts of icing on airplanes allow airports to plan de-icing more cost-effectively (Met Office, 2005). The Met Office site** lists a range of other services, such as long-range local forecasts for people taking out insurance against the cancellation of outside events due to bad weather, and services for supermarkets so that they can plan to have the optimum food stocks in place in stores — there is little logic in stocking lots of barbeque food for a weekend that will be washed out by wind and rain. The Ordnance Survey of Great Britain (OSGB) applies this type of pricing to what it terms licensed partners.*** In this category, the price of using OSGB data is constructed from a fixed plus variable cost. The fixed cost covers the administrative costs of maintaining the relationship and providing the data and support. The variable cost is a revenue stream that is a proportion of the sales price of the value-added applications undertaken and marketed by partners. In an extensive review of information in the global economy and society, Scott Lash differentiates between information that is sold as a commodity (exchange value) and that which generates added value through reuse and repackaging (use value), warning that in the information society much more revenue is generated through use value (Lash, 2002). In the con-text of GI we could apply those criteria to OSGB, where Lash would warn * That means you hear the weather forecast free on the radio or television and can look for local forecasts on sites such as http://www.bbc.co.uk/weather or globally on sites such as http://www.weather.com. ** http://www.metoffice.gov.uk/services/index.html. ***http://www.ordnancesurvey.co.uk/oswebsite/partnerships/licensedpartners/index. html. ` 2008 by Taylor & Francis Group, LLC 98 Geographic Information: Value, Pricing, Production, and Consumption that just selling data is not likely to generate significant income where the market is increasingly complex and requires more sophisticated data pro-duction (Longhorn and Blakemore, 2004). Put simply, the ongoing use value of OSGB data is an increasingly important part of the income stream, and this then imposes increasing demands on OSGB for support and database development, including updating, maintenance, and enhancement of the data itself. The pricing model of OSGB is a hybrid approach to a complex market, building in particular on the importance of use value. The revenue stream is made up of core customer groups who pay a central license fee that covers all users in the sector, e.g., utilities, local government, and academia are core license areas. In addition, a form of universal service license existed for some years in the context of the National Interest Mapping Services Agreement (NIMSA). This covered costs for central government usage of the data and guaranteed that areas where a revenue-focused business would not concen-trate resources, such as remote rural areas, coastlines, etc., would continue to be mapped to the same resolution, timeliness, and quality as other areas in Britain (DCLA, 2006). However, like the museums example earlier in this book, NIMSA was contingent on the willingness of the U.K. government to pay a central subsidy. Late in 2006, after a review of the costs and benefits, the agreement was terminated. OSGB’s reaction was to advise users that there would be “an impact on the currency and content of the rural geography in our products” (Survey, 2006b), with the possibility of longer rural revision cycles. However, the contest between supply and demand was evident again in the statement by OSGB that it would explore technological efficiencies, i.e., doing more for less cost, in order to try to compensate for loss of the NIMSA funding, and that key activities such as data for emergency services and coastal mapping would be maintained “in the national interest despite the extra cost burden.” Strategic national interest developments can also be funded on a public– private basis, such as the initiative to produce large-scale underground asset three-dimensional maps (Kablenet, 2006). There are then revenue streams from sales of printed products, from licensing data to private sector com-panies, from value-added partnerships with private sector companies, and from OSGB’s own commercial digital products (Survey, 2006a). 4.2 Extending pricing theory Using the range of examples of the free lunch discussed in Chapter 3, we propose to extend the levels of price discrimination to include zero-degree price discrimination. This category is primarily concerned with the pricing of public sector information goods, where pricing mainly is set through a public subsidy that allows the organizations to disseminate the data largely free of any charge. The pricing dilemmas that emerge in this context are articulated by Claudio Ciborra, including how to avoid “free riders,” such as ` 2008 by Taylor & Francis Group, LLC Chapter four: Pricing Information 99 ourselves, for example, when we applied for access to the San Francisco data in the example in Chapter 3, and “who should pay for the positive and/or negative externalities created by use?” (Ciborra, 2002, p. 60). 4.2.1 Zero-degree price discrimination In the zero-degree price discrimination category are organizations such as most U.S. federal agencies or U.K. National Statistics. In these organizations, the data owner has no ability to link the market take-up of data to any rein-vestment program, other than to beg for more subsidy funding. This makes for a nice scenario on the basis that data are free to all users, and super-ficially, the data are easily disseminated via the Internet, i.e., friction-free with no replication costs beyond the initial sunk investment. Yet there is no mechanism by which user needs can be linked to the funds that will satisfy them, for example, for new data formats or new types of data. In recent years, the new public management approaches have allowed the naïve belief that efficiency gains will deliver service improvements. However, whatever hap-pens, the zero-degree price discrimination category initially mediates data to users, as in “Here it is, it’s free, use it!” but then dis-intermediates poten-tial service improvements from customer needs, i.e., “Well, it’s free, so don’t come to us asking for more!” Central planning approaches to government have long since been criti-cized politically (for example, communism), but the more plausible reason for the zero-degree category being so problematical at present is that the mecha-nisms by which governments obtain income have moved substantially from direct taxation to indirect taxation and user charges. With smaller propor-tions of the total population entering the labor market, which impacts directly on levels of direct (income) taxation, as well as political imperatives to lower the levels of taxation (to keep the voters happy), and with more people living into old age, resulting in greater demands on health and social services, the political attraction of indirect taxation is significant for politicians desperate to satisfy all sections of the voting public. Even the elderly pay sales tax, and the need for government to temper financial demands on health services can be offset in part by the customers paying for some services. More frequently, a form of rationing of the service is used, known as the waiting list — you can have the treatment, but you will need to wait some time. The same can be seen with zero-degree GI. The current less-than-com-plete state of U.S. national topographic mapping (NRC, 2003) was substan-tially the result of historical underinvestment, exacerbated by the fact that there was no income stream other than the government central subsidy. The Weaving The National Map approach has been an attempt to appeal to national altruism, through cooperative agreements (FGDC, 2006) as a means of indirectly funding improvements in national mapping. It says in effect, “Let us work together to weave all the high-quality data held at various geo-graphical levels,” but the major cost of doing this is to be borne by the data ` 2008 by Taylor & Francis Group, LLC ... - tailieumienphi.vn