Models for pricing the distribution of information and the use of services over the Internet : A focus on the capital data market industry

Ioannis Demetriades, Thomas Y. Lee, Alexandros Moukas, George Zacharia


1.0 Introduction

2.0 Key Competitors /Markets/Products

2.1 Integrated Data Market

2.2 Retail Data Market

3.0 Analysis of Pricing Schemes

3.1 Aggregation

3.2 Fee Structure

4.0 Conclusion



1.0 Introduction

The distribution of intangible financial goods and information and the use of network based financial services in general is experiencing a tremendous growth in recent years. In this research briefing we will investigate the use of pricing models in pricing the distribution of financial information and the use of financial services over electronic distribution lines. We will present up to date data about current information pricing models as well as possible future trends.

It appears that the ease of replication and distribution of electronic data is making the use of traditional pricing schemes (e.g. Price=Marginal Cost) obsolete [1]. In their efforts to maximize their revenues, providers of digital financial information goods are experimenting with different pricing schemes. The Internet has made it possible to repackage content using bundling, site licensing, subscriptions, rentals, and differential pricing and per-use fees [2]. All of the above pricing techniques could be considered as examples of aggregation or disaggregation of information goods along some dimension [3]. Aggregation can be across products as with bundling stock price quotes from different exchanges; it could be across consumers as with the provision of a site license by Lexis/Nexis to MIT; and it could also be across time as with the subscription that a Bloomberg Customer has to pay to get several services and products for a specific period of time.

Our research is focused on the distribution of information and the provision of services in the capital market data industry. We provide an overview of the key competitors, markets, and products. Finally, we make an in-depth analysis of the different pricing schemes used by the industry players.

2.0 Key Competitors /Markets/Products

The capital market data industry has experienced a slow growth of less than 5% / year in the past five years [4]. The market is divided into two distinct segments:

During our research, we observed that several institutional brokers (e.g. Merrill Lynch) and some exchanges (e.g. Nasdaq) have also joined the market for catering to the retail sector. The flow of market data is best illustrated in Figure 1. The three vendors of capital market data, e.g. Bloomberg, Reuters, Bridge, buy data from exchanges and distribute them to institutional and retail brokers as well as directly to the retail market.

Figure 1: The Flow Of Capital Market Data

2.1 Integrated Data Market

The capital market data industry has changed the traditional boundaries and relationships between market data vendors & their customers. The movement in the industry from video page feeds to digital feeds has led to increasing commodization of market data by allowing users to easily replace data sources. This force has squeezed data vendors in their traditional market and forced them to look for opportunities in other areas.

Market data vendor’s responses have been twofold: expand across the financial markets (equity, fixed income, foreign exchange and commodities) and expand the range of product offerings, which include data distribution and integration, trading systems and electronic messaging, news and media.

Bloomberg, Bridge and Reuters are virtually the only vendors who are attempting to deliver integrated market data application. All three are concentrating much of their current efforts on equities. The vendors focus on equities, particularly equities trading, seeks to maximize penetration among its users. Trading functions require a screen on every desktop and is particularly important for Bloomberg, which lacks full exposure on equity trading floors. All three vendors also offer electronic messaging capability, via their proprietary global networks, which further encourages customers to purchase a screen per user to enable secure and confidential messaging.

Product Offerings By Integrated Market Data Providers:














Real Time Quotes

Historical Prices






Research & Commentary

Integrated Applications




Offering Competitive Advantage


-- Not Available

Source: The Tower Group

2.2 Retail Data Market

Retail oriented brokers provide access to their product and services either through the use of the Internet or through the use of their proprietary software and the use of standard telephone lines. Some companies use both methods of providing access to their services to the retail market. This research briefing focuses on the Web sites managed by financial information aggregators and brokerage and mutual fund companies. We came up with the range of services these Web Sites provide. The companies with Web presence can be divided into three groups, characterized by their services, products and target messages. The range of investment services that can be offered on the Web, from which these companies can choose in defining their Web Strategies, can be categorized into three groups as follows:

Product Offerings by Vendors in the Retail Data Market


Information Support

Price Quotes

Real-time & delayed quotes for stocks; NAV’s for Mutual Funds; Market Indices

Management & Objectives

Fund Objectives & Strategy, manager’s profiles, fees and charges, SEC filings


Historical Performance (Price & Volume) in numeric & graphical form.


SEC stipulated document providing required fund information (objectives, policies, fees) to potential investors; delivered on-line or by mail.

Research & Analysis

Investment Guidelines, technical discussions, advisory letters, economic forecasts and reports.

Investment Tools

Personal portfolio tracking, search tools

Account Services


On-line forms


Account balances, outstanding trades & transaction history



Internet Real time stock & options orders, and access to account holdings, executions, and open orders.


Branch locations and telephone lines for standard trading.


Several companies, have both on-line and offline services (e.g. Schwab Co). As of July 1997, Charles Schwab had over 908,000 active on-line accounts, approximately 30% of the industry total of three million accounts. These accounts generated approximately 36% of the company’s average daily trading volume of 114,700 trades [5].

3.0 Analysis of Pricing Schemes

Managers of firms in the capital data market industry have a hard job in making pricing decisions regarding their products and services. The pricing decision is made hard because of the ease of replication and distribution of electronic data, which makes the traditional pricing scheme Price=Marginal Cost not desirable. Therefore, the managers of these firms are beginning to use alternative pricing strategies. The basic objective of every pricing strategy in use is to capture as much consumer surplus as possible and convert it into additional profit for the firm. Therefore, managers are using bundling, two-part tariffs, and price discrimination to capture as much consumer surplus as possible.

There are two dimensions to pricing schemes. A pricing scheme is composed of the aggregation (or disaggregation) schemes and the accompanying fee structures.

3.1 Aggregation

Aggregation is beneficial for capital market data vendors for two reasons:

It is important to note, that one aggregation technique, namely bundling makes sense when customers in each of the product markets involved have heterogeneous demands. In technical terms, we can say that bundling makes sense when demands of each individual product are negatively correlated.

Retail broker institutions, whose domain of activities extends to the physical off-line world, tend to bundle their online with their offline services. Consider for example E.Schwab, which is the online trading service of the Schwab Co. Schwab Co. was offering the same kind of service through telephone (both through the use of a customer service agent and of touch tone) before deciding to go online. At the beginning the two services (web-based and telephone) were subject to different pricing schemes, then they were bundled and offered at a discount to the subscribers who decided to join both. At a later stage, Schwab Co. expanded its online service to include their phone service for the same price, at a time when prices for on-line services were falling. In essence, Schwab bundled together two negatively correlated services to maximize their profits.

Another form of bundling practiced by online retail focused broker firms, is to combine two different on-lines services. The online trading firm E*Trade, bundles financial information with its trading services. E*Trade is a competitor of e.Schwab that offers only online services. This difference is due to the fact that E*Trade entered the business of online trading as its focus from the beginning, while e.Schwab existed as an offline service before. E*Trade provides real stock quotes, stock market history, risk analysis and other relevant financial information to its subscribers as long as the customers have a minimum amount of $1000 deposited in their portfolio and they commit a minimum of two transactions per year using E*Trade.

Dow Jones, bundles financial information with other electronic services such as a news-track email service and a services that monitors and filters news about specific companies, industries, or general areas of interest. Dow Jones offers to its subscribers the table of contents of the filtered articles for free, but they have to pay for them on a per article basis if they want to retrieve the whole text of any of them. Thus, they can exercise price discrimination based on the sensitivity of their subscribers to the depth of each information good.

As we have seen some companies exercise price discrimination by charging different prices for different depths of information. For example they can charge smaller fees for the headlines of the articles, something more for the abstract and even more for the full text of the article. For example the Dow Jones, charges on top of its annual fee of $29.95, a fee of $1.00 per cite, a fee of $2.00 per lead and a fee of $2.95 per article when users access the company’s archive.

Aggregating different products and services was also used as a marketing tool. Our research showed, that Investment Companies often attempted to entice visitors at their Web sites to enter into higher levels of participation with the company (i.e. "sell them up"), by offering discriminated services at various levels of participation, and by actively promoting the higher level services to visitors of the pages available for perusal at the lower level. Visitors at Web Sites could typically be assigned into three "participation" classes with increasing privileges in each as follows:

Integrated Capital Market Data Vendors offer a combination of product bundles to institutionalized brokers. However, our research was unable to reveal any information concerning the nature of such bundles.

3.2 Fee Structure

In addition to developing distinct product bundles, purveyors of goods advertised or sold through electronic markets may implement any number of complex fee schedules. Fee schedules cover a set of options that range from simple, one-time, fixed fee charges through complex, non-linear schemes. In between lie a myriad of "mixed" strategies. We discuss a number of possible fee structures and illustrate those schedules with examples drawn from on-line products offered by the financial information services industry.

The fee structure for information products can vary along three dimensions: price, quantity, and time. Different pricing strategies will vary price as a function of one (or both) of quantity and time. A pure, fixed fee strategy would charge users a single price for access to all of the data and information, which the vendor has to offer over time.

"Subscription" pricing is a variant on a pure, fixed fee model that enables users unlimited access to the producer’s data and information for a pre-specified amount of time. Subscription pricing is commonly associated with periodicals. The Wall Street Journal Interactive Edition, for example, charges users a single, fixed fee of $49.00 per year. That print subscribers to the Wall Street Journal are charged the fixed fee of $29.00 per year is an illustration of how fee structures and ability to divide consumers interact to form a pricing strategy. Lexis-Nexis charges a single, flat, yearly subscription fee for live feeds of EDGAR SEC filings. A less expensive yearly subscription fee for 24-hour delayed tape delivery of all SEC filings provides another example of the interaction between discrimination and pricing strategies.

More than just traditional periodicals, however, subscription pricing is also applicable to more sophisticated financial information services. For $12.95 per month, Hoover’s On-line provides users with access to the Hoover archive of market research and company financial profiles. Moreover, that Hoover charges $124.95 for a yearly subscription (a $30.00 discount over the monthly subscription) illustrates how fixed fee structures combine with bundling over time (monthly versus yearly subscription).

A pure, standard linear fee schedule holds one of quantity or time constant and sets price as a linear function of the third variable. With respect to quantity, a linear schedule might, for a given user session, charge a user a constant amount for every document accessed. Because the marginal cost of offering an additional document or piece of information is virtually zero relative to the cost of adding an additional user to the billing and accounting system, pure linear schedules are less common than the non-linear "mixed" strategies that combine a linear model schedule with other schemes.

Two-tier pricing schemes impose both a fixed fee component and a linear-cost structure. A common two-tier structure might include a flat fee in order to subscribe to the service and then a constant charge for every item ordered. Investext’s Telecom Securities on-line archive of market research reports charges both a periodic subscription fee and then $6.00 per page from any report in the archive. The Investext pricing strategy combines a two-tier fee schedule with a service bundle that allows users to search the archive and to view report titles, bibliographic reference information, and blurbs for free. In addition, users may elect to pay a fixed fee of $75.00 per report for the entire report rather than $6.00 per page.

Variations on two-tier pricing like three-tier or n-tier pricing are also possible. The Wall Street Journal Interactive Edition provides subscribers with access to the Dow Jones Interactive periodicals archive. Both searching and the first ten articles retrieved are free. This three-tiered model with respect to quantity therefore charges users a flat subscription which applies to the first ten articles after which there is a constant, per article charge for every additional article retrieved.

The Dow Jones Interactive fee schedule is an even more complex variant on the three-tier model. Dow Jones Interactive is essentially a data source aggregation service, which permits users to search multiple sources in a uniform manner. After paying a flat, $29.95 yearly subscription, the customer pays a per document cost that varies depending upon the source of the content. Articles from the Dow Jones archives are charged at a constant cost per each additional article. Reports from Investext are charged at $7.50 per page. Reports from market research range from $6.00 per page to more than $20 per page.

Second-degree price discrimination schemes such as block pricing are also seen in the on-line financial information services industry. Lexis-Nexis employs a block fee schedule with respect to time for archives of the SEC filings archives. Depending upon the year of the archive, Lexis-Nexis charges a different fee for the different quarterly and yearly filings. Therefore as you buy more tapes and/or older tapes, the price per tape is lower.

To demonstrate, the complexity and variability of pricing an information good, we examined the pricing of stock quotes as they flow down the supply chain; from their producers (the exchanges) to their users (both the retail data market and the institutionalized brokers). Exchanges provide stock data to information vendors through contracted private line services. Some of these vendors (e.g. Reuters), in turn, consolidate feeds from various exchanges into a comprehensive quotes service which they provide their investment company clients via private lines or satellite feed. The exchanges consider 15-20 minute delayed stock quotes to be "in the public domain" and provide them to the information vendors as part of a basic service with basic information services. (Flat fee pricing) However, the exchanges charge the information vendors for access to and release of real-time quotes, according to contracts that include a rate structure that typically accounts for the number of end-users who may get assess to the information.(Two-part tariff, Linear fee, Site Licensing) Brokerages purchase price quotes services from the information vendors, paying them fees that reflect the exchange charges. In turn, brokers provide price quote services that reflect these costs. Servers that provide delayed cost quotes free of charge are available at a number of brokerage sites. However, only a few of these sites support real-time quotes. Some of the real-time quote services are promoted as privileges reserved for account holders (e.g. Lombard), while others are offered on a fee basis (e.g. . $20/month at Aufhauser).

The schemes illustrated above are only a fraction of the possible fee structures, which could contribute to an overall pricing strategy. In addition to non-linear variants on linear fee structures, virtually any non-linear, monotonically increasing relationship between payment and quantity or payment and time is a valid scheme. Only time will tell whether the fine-grained customer discrimination afforded by complex pricing schemes will prevail or whether customers will opt for the simple, flat fee subscription pricing that is so prevalent in other computing and communications markets such as Cable television or Internet Service Provision.

4.0 Conclusion

The examples drawn from real financial information services that are included in the previous sections serve to illustrate how aggregation and fee structures combine to form a pricing strategy. At the same time, perhaps the examples demonstrate the often-fuzzy distinction between the two components.

Fee structures can look a lot like bundling. A three-part tariff can look like a bundle, which combines a subscription with a number of articles. Some customers will prefer a bundle, which offers 10 free trades whereas others will prefer five free trades and five free industry reports. Finally, pricing schemes and customer can also look alike. Some customers will opt for a monthly subscription over a yearly subscription despite a discount for the yearly subscription.

On one hand, the future of markets in the on-line capital data market industry has never looked brighter. Producers today have access to an endless supply of electronic data and at the same time, the ever-expanding information infrastructure serves to grow the customer base for electronic data service markets. On the other hand, the low marginal cost of production and distribution has allowed increased commodization of the capital data market. We therefore believe that the differentiation of products and services is critical to the profitability of the capital data vendors. Not only would aggregation techniques allow vendors to differentiate their products and services, but would also have a significant effect on improving social welfare by reducing the monolistic deadweight loss [8].


  1. Varian, H. "Differential Pricing and Efficiency." SIMS working paper, Berkeley, June, 1996.
  2. Bakos, Y., and Brynjolfsson, E. "Aggregation and Disaggregation Of Information Goods: Implications for bundling, Site Licensing and Micropayment Systems." June 1997.
  3. Ibid.
  4. The Tower Group. "Market Data Applications: Solid Growth Area in a Mature Market"
  5. The Tower Group. "Internet Trading at Charles Schwab & Co: A Case Study". August 1997
  6. Bakos, Y., and Brynjolfsson, E. "Aggregation and Disaggregation Of Information Goods: Implications for bundling, Site Licensing and Micropayment Systems." June 1997.
  7. Bakos, Y., and Brynjolfsson, E. "Bundling information goods: Pricing, Profits And Efficiency". December 1996.
  8. Bakos, Y., and Brynjolfsson, E. "Aggregation and Disaggregation Of Information Goods: Implications for bundling, Site Licensing and Micropayment Systems." June 1997.


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