Analysis of pricing strategies for e-business companies providing information goods and services Kang Bae Lee a, * , Sungyeol Yu b , Seong Jun Kim c a Division of Management Information Science, College of Business Administration, Dong-A University, 840 Hadan2-Dong, Saha-Ku, Busan 604-714, Republic of Korea b School of Business Administration, Catholic University of Pusan, 9 Bugok3-Dong, Keumjeung-Ku, Busan 609-757, Republic of Korea c Department of Industrial Engineering, Kangnung National University, 120 Daehangno, Gangnung 210-702, Republic of Korea Available online 4 August 2006 Abstract In this paper, we introduce a mathematical model to analyze pricing and service quality strategies for e-business com- panies providing information services to customers. The basic strategy considered in this paper is that a monopolistic e- business company provides free services to try to earn a profit by developing premium goods or services to market created by their free goods or services. It is a kind of versioning strategy where lower quality versions of information goods are provided free. And a direct network effect was also considered. And we tried to find the profit maximizing strategies for monopolistic e-business companies. As a result, the optimal quality and price for the premium goods or services can be obtained at the same level of the intensity of the direct network effect. And the exact term related with the network externality is derived and insights are demonstrated through numerical explorations. Ó 2006 Elsevier Ltd. All rights reserved. Keywords: Pricing; Quality; Internet; e-Business; Free goods; Versioning; Information and services 1. Introduction This paper develops and analyzes mathematical models for e-business companies that provide informa- tion goods and services with unlimited-usage (fixed-fee) pricing. The most basic definition of e-business is simply using the Internet to connect with customers, partners, and suppliers. e-business is becoming the trademark of the 2000s. Today, companies are using the Internet to communicate with their partners, connect with their back-end systems, and perform e-commerce transactions. To compete successfully, enterprises are demanding effective ways to implement and deliver information goods over the Internet. Information goods mean all products that can be digitized such as software, news stories, stock quotes, 0360-8352/$ - see front matter Ó 2006 Elsevier Ltd. All rights reserved. doi:10.1016/j.cie.2006.06.014 * Corresponding author. Tel.: +82 51 200 7448; fax: +82 51 200 7481. E-mail address: kanglee@dau.ac.kr (K.B. Lee). Computers & Industrial Engineering 51 (2006) 72–78 www.elsevier.com/locate/dsw