Research on choices of methods of internet of things pricing based on variation of perceived value of service

Li, Wei; Mei, Lijun; Nie, Kai Article Research on choices of methods of internet of things pricing based on variation of perceived value of service Journal of Industrial Engineering and Management (JIEM) Provided in Cooperation with: The School of Industrial, Aerospace and Audiovisual Engineering of Terrassa (ESEIAAT), Universitat Politècnica de Catalunya (UPC) Suggested Citation: Li, Wei; Mei, Lijun; Nie, Kai (2013) : Research on choices of methods of internet of things pricing based on variation of perceived value of service, Journal of Industrial Engineering and Management (JIEM), ISSN 2013-0953, OmniaScience, Barcelona, Vol. 6, Iss. 1, pp. 175-187, https://doi.org/10.3926/jiem.619 This Version is available at: https://hdl.handle.net/10419/188517 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc/3.0/ Journal of Industrial Engineering and Management JIEM, 2013 – 6(1):175-187 – Online ISSN: 2013-0953 – Print ISSN: 2013-8423 http://dx.doi.org/10.3926/jiem.619 - 175 - Research on choices of methods of internet of things pricing based on variation of perceived value of service Wei Li, Lijun Mei, Kai Nie College of Economic and Trade, Hunan University (China) [email protected], [email protected], [email protected] Received November 2012 Accepted February 2013 Abstract: Purpose: With the rapid progress of Internet of Things technology, the information service of IoT has got unprecedented development, and plays an increasingly important role in real life. For the increasing demand of information service, the pricing of information service becomes more important. This paper aims to analyze the strategic options and payoff function between information provider and intermediaries based on Stackelberg game. Firstly, we describe information service delivery method based on the Internet of Things specific function. Secondly, we calculate the consumer demand for the information service. Finally, we explain two kinds of strategic options by the game theory, and then discuss the optimal pricing method of information services based on profit maximization. Design/methodology/approach: To achieve this objective, Considering the consumer perceived value of Internet of Things Service changing, we establish a Stackelberg model in which the supplier is the leader followed by the middleman. Then, we compare the advantages of using individual pricing with that of bundling pricing. Findings: The results show that whether information providers adopt bundling pricing strategy or individual pricing strategy depends on the cost of perception equipment, if information Journal of Industrial Engineering and Management – http://dx.doi.org/10.3926/jiem.619 - 176 - providers want to adopt individual pricing strategy, the variation of consumers’ perception value of information services must meet certain conditions. Research limitations/implications: the providers make price for the information service, in addition to continuously improve the quality of information service, it also devotes resources to tapping and understanding market information, such as the sensor device price, the variation of perception value of information services and so on, so as to create competitive advantage. This paper is just a preliminary model, it does not take into account the effect of mixed bundling. Originality/value: In this research, a new model for price information service with the game theory is proposed. To the authors' knowledge, it is the first time to study the pricing of information service with the game theory, It discuss the impact of consumers’ perceived value for the equipment of internet of things on pricing strategy, and it also analyze the impaction of consumers’ perceived value for information service on pricing strategy, the research shows that the information providers should take different strategies based on the specific situations to maximize the profit on the information service market of the IOT. Keywords: Internet of things; Individual pricing; Bundling pricing; Services pricing 1. Introduction The 12th Five-Year Plan of China has clearly stated that Internet of Things should be developed to be a strategic emerging industry and promote its application in some important areas, highlighting that Internet of Things have been improved to the national strategic level. With the application of Internet of Things technology in the service industry, the pricing of information services cannot be avoided. What’s more, the pricing of Internet of Things (IOT) is an important part to introduce information services into market. How to determine an appropriate pricing scheme which service providers, intermediaries and consumers are willing to accept, this makes pricing of Internet of things information service become a hotspot nowadays. Why information services should be pricing for the IOT have got lots of attention in the literatures. Eva considers information as the main source for value proposition based on “economic value creation” theory, and uses the information law to prove his conclusion, then, proposing that pricing is an important step for introducing information service to the market. In addition (Eva & Dieter, 2010), Elgar put IOT technology into use in the transportation, and analyses the users and Journal of Industrial Engineering and Management – http://dx.doi.org/10.3926/jiem.619 - 177 - businessmen’s benefits, consequently he finds out that IOT can reduce transaction costs and market risks, then attempts to propose the appropriate market structure and pricing mechanisms which makes the business model successfully applied based on sensor service (Elgar, 2010). Jens applies the market design and pricing mechanism to the IOT, pointed the important participations in the internet of things service market, which includes consumers, intermediaries and information service providers. At the same time he gives the necessary steps to establish this kind of market (Jens & Christoph, 2009). Wang and Yan analyse the application demands and industry driven effects of IOT, and indicates that the pricing of information service is the problem needed to be solved with the information service of IOT spread in use (Wang & Yan, 2010). Chen confirms that information service of IOT is one of the most application forms of economic value, pointing the operators’ role in the process of information service (Chen & Han, 2010). Furthermore, Zhang points out that when promoting information services related to pricing, operators should integrate the advantages of resources and develops differentiated service (Zhang, 2010). IOT will provide location independent, interoperable, scalable, secure, and efficient access to a coordinated set of services, so we should adopt to a reasonable pricing to develop IOT. Theodore and Trakadas consider IOT are quickly gaining popularity due to the fact that can be used in a variety of application areas, the issue of privacy protection is as important as secure and reliable functioning of a network (Theodore & Trakadas, 2009). Some scholars make further studies for how to price in the IOT based on the above literatures, Michael and Markus apply IOT technology to the automobile insurance in order to ensure that the service pricing is based on actual driving risk, but do not represent the appropriate model. The result is mainly qualitative description but lacking of a quantitative support (Michael & Markus, 2010). Christian and Martin concentrate on the technology applied into the supply chain, and puts forward a model of smart equipment costs from a quantitative point of view, treated the variation of technology prices, consumer utility and the fixed cost as parameters to assess income changes of providers, consumers and shippers, and finally provides pricing strategies for pricing makers (Christian & Martin, 2010). Gerd, Kawsar, Fitton and Vasughi think an activity-aware smart object analyzes the data stream from its sensors, uses recognition algorithms to detect activities and events, and applies application-specific aggregation functions. So the discussion of usage-based pricing policies for smart products appears elsewhere (Gerd et al., 2010). Sun introduce a real case of Internet of Things called ZB IoT, It combines the Service Oriented Architecture (SOA) with EPC global standards in the system design, cited an example of how to pricing for the IOT (Sun & Aersriten, 2010). Gao and Liang built a structural equation model of the internet of things, and the results showed that the consumers’ potential demand for the internet of things was determined by their willingness and affordability，their willingness was determined by their perceived usefulness and perceived value (Gao & Liang, 2012). Although it involves the pricing problem in his paper, it ignores the incomplete information conditions and market competition. Journal of Industrial Engineering and Management – http://dx.doi.org/10.3926/jiem.619 - 178 - From the above studies, we can see the articles applying the game theory to price information service are rare. This paper aims to analyze the strategic options and payoff function between information provider and intermediaries based on Stackelberg game. Firstly, we describe information service delivery method based on the Internet of Things specific function. Secondly, we calculate the consumer demand for the information service. Finally, we explain two kinds of strategic options by the game theory, and then discuss the optimal pricing method of information services based on profit maximization. 2. The Basic Model 2.1. Model Setting 1 2 3 4 6 5 Consumer Information providers Physical world Intermediaries Figure 1. The delivery routine of information service in the IOT In the IOT market, it involves three entities when selling information services: information providers, intermediaries and consumers. Bundling is the first choice when selling sensor information to consumers. Throughout the whole economy activities, the consumer passively accepts the price. As shown in Figure 1, we can find out that the consumer firstly sends the information request to intermediaries, and then the intermediaries obtain basic information through the deployment of intelligent sensor node to the physical world. Furthermore, information providers integrate and process this physical information. Finally, the final information could be fed back to consumers by the verse routine. In the information services market, services fee that are charged by consumers is consist of two parts: expense paid to the information providers and that to intermediaries. Therefore, the relationship between intermediaries and information providers will affect the results of bundling pricing (Zhang & Tang, 2008). In order to better analyze the problem, the participants are limited as follow: Consumer When consumers use the information provided by the IOT, the scene information has to be obtained by the perception equipment. Only when a wealth of information are aggregated Journal of Industrial Engineering and Management – http://dx.doi.org/10.3926/jiem.619 - 179 - together through a variety of sensors and labels for identification, perception, then coordinate with each other, can IOT provide a full real-time coverage and time-sensitive information services, and can consumers get information about location, environment at any place. In order to effectively solve the problem of information service pricing, this article adds the cost of the sensor equipment to elaborate the effect of information services pricing. It assumes that the consumers’ reservation utility function is V(RE,pe). Parameter RE is the consumers’ evaluation value of the information services in an ideal condition, the value obeys a certain probability distribution, the density function is f(RE) and distribution function is F(RE). Parameter pe is the expenditure of perception equipment paid by consumers when enjoying the information services. Perception equipment and the required information have a complementary relationship with each other. In addition, parameter RE and parameter pe are not relevant with each other. Only when RE> pe, consumers will purchase the equipment, so the consumers reservation utility function can be expressed as: V(RE,pe)=RE-pe. Intermediaries Intermediaries provide market platform for connect information providers and consumers. Intermediaries are charged to consumers based on flow. This article supposes the price of per unit flow is pi and each size of information services (bytes) is also the same. It takes an average time t on each information services for consumers. Profits from each service to intermediaries can be described as pit. Considering intermediaries providing distribution channels and marketing platforms, we assume that the marginal cost of transmission is zero. Information providers In the IOT Information services market, information providers supply N(N>2) kinds of different information services to consumers with zero marginal cost. There are two sales models: individual pricing and bundling pricing. In the individual pricing strategy, the unit price for information services is pc. While in the bundling pricing, the price for the information service package is pb. Information providers select a different sales model through the maximize profit principle, and thus making different prices for information services. 2.2 Model Establishment When the information providers adopt different strategies, behaviors of consumers are different, so the demands of information services are also not similar with each other. When the information providers adopt bundling pricing strategy, for the intermediaries charge to consumers based on flow, if consumers spend a piece of information service, the fee paid to intermediaries is pit, and the consumer surplus can be expressed as: Journal of Industrial Engineering and Management – http://dx.doi.org/10.3926/jiem.619 - 180 - c E e c i CS R p p pt    (1) Only when CSc>0, consumers will spend on information services, so: tpppR iceE  (2) Then the corresponding demand function is: )(1)( tpppFdRRfd iceE tppp Ec ice    (3) When consumer needs N pieces different information services, due to adopting bundling pricing strategy, customers need to purchase them in N kinds of different markets to, so the total demand for information services is Dc=Ndc. In order to facilitate the game analysis between intermediaries and information providers, we assume the consumers’ evaluation of information services RE subjected to uniform distribution on[0,R] in an ideal situation, so: )1( R tppp ND ice c   (4) Under the condition of individual pricing strategy, when customers want to consume one or more pieces services in N information services package, they must purchase the entire information services package, consumers’ utility evaluation to the information service package will be affected by the correlation of service (Venkatesh & Wagner, 2003), so the demand of service package market is not the sum of N kinds of market requirements. The consumers’ total evaluation of information service pack is NRE+  V. Compared with N kinds of items for sale, V represents the variation of consumers’ evaluation under individual pricing strategy. When V >0, it means the value of the information service package is greater than the summation of every information service’s value; if V <0, it means the summation of every information service’s value is not less than the value for bundling. The time consumers spending on service package is Nt, so the price paid to intermediaries is Ntpi, and the consumer surplus is CSb=NRE+V pe-pb-Ntpi. Journal of Industrial Engineering and Management – http://dx.doi.org/10.3926/jiem.619 - 181 - Only when CSb > 0, the customers would purchase the information service, so; N VpNtpp Rbie E   (5) As a result, the demand for bundling pricing information service is: NR VpNtpp dxxfD bie N VpNtpp bbie     1)( (6) 3. Information Services Pricing of Providers Based on Stackelberg Game Under the circumstance of adopting different pricing models, in order to compare the difference of the information providers’ profits, according to the literature 9, we can know the priority price maker will get first mover advantage in the information services market. Therefore, we analyze the profits difference for the information providers in this paper, it is the first to carry out pricing decisions for information providers, that is to say the information providers know the response function of intermediaries, while the intermediaries don’t know the information provider’s response function. 3.1. Information Providers Profit under the Individual pricing Strategy At this point, the profit function of the information providers is: )1( R tppp NpDp ice cccsc    (7) Because the intermediaries are charged fees based on the flow, in order to meet the demand, therefore the required time is written as Dct, then, the expected profit intermediaries obtained is: )1( R tppp tNptDp ice iciic    (8) Mathematically, it can be seen the formula (7) is quadratic function against pc, formula (8) is also concave quadratic function against pi. In order to maximize  sc and  ic, we should make first-order derivative against pc for formula (7) and first-order derivative against pi for formula (8). According to the derivative to formula (8), we know that the intermediaries’ response function of Journal of Industrial Engineering and Management – http://dx.doi.org/10.3926/jiem.619 - 182 - the information providers is: t ppR pce i2   (9) Handling (9) into formula (7), we can know the profit function of the information providers is: R ppRNp cec sc 2 )(    (10) Making formula (10) derivative against pc, we can obtain the optimal prices respectively are: 2 e c pR p  , t pR pe i4   . And then, the profit function of the information providers is: R pRN e sc 8 )( 2    (11) 3.2. Information Providers’ Profit under the Bundling pricing Strategy So the profit function of the information providers is )1( NR VpNtpp pDp bie bbbsb    (12) At the same time, the profit function of the intermediaries is: )1( NR VpNtpp NtpNtDp bie ibiib    (13) It is easy to see that formula (12) is concave to pb, formula (13) is concave to pi. In order to maximize the profit, we should make formula (12) first-order derivative against pb and formula (13) first-order derivative against pi.