Yes, I believe that the pricing issues Varian describes for information goods and those we looked at for peak capacity pricing in the electricity industry will lead to important differences in the competitive environments of these two industries, because peak load pricing will no longer define profitability for the information industry, as it does for the electricity industry. The electricity industry can price its products competitively, through the use of peak pricing. The competitiveness in the information industry, on the other hand, will be affected by the traditional principles of competitive strategy, by being either a differentiation leader or a cost leader, while competitiveness in the electricity industry will be defined by its ability to be a cost leader, primarily through an efficient peak pricing system.
Using peak-load pricing, the costs of capacity are passed to peak users, and this makes electricity production more efficient during peak production, because extra capacity is paid only by those who drive capacity up. In addition, peak hours determine necessary capacity, so that off-peak consumption can increase without any significant increases in capacity. Peak pricing, however, do not apply to the information industry, because information products have high production cost, but low reproduction cost (Varian, 22). Even when there is high demand for information products, extra capacity will not cost information companies a great deal of money. An example is the Encarta CDs being sold by Microsoft. The variable cost of additional production almost costs nothing, which enables Microsoft to reap 92 gross profit margins (Varian, 21). This is even more pronounced for information products available online, wherein companies that list their prices drive prices to decline toward the marginal cost. After understanding the limitations of peak pricing for the information sector.
The competitiveness in the information industry will be affected by the traditional principles of competitive strategy, by being either a differentiation leader or a cost leader, while competitiveness in the electricity industry will be defined by its ability to be a cost leader, primarily through an efficient peak pricing system (Varian, 25-26). Since the cost of producing more information products almost cost nothing, competitiveness in the information industry can be attained through cost or differentiation leadership. Through cost leadership, information companies can control their sunk costs, so that they can produce the first product at the lowest possible cost, and additional products, at minimal or almost no marginal cost. If one company produces and sells products at a price that is greater than the marginal cost, then it can still sell its price lower than competitors and still make a profit. Cost leadership is not always easy to attain, however, because of the identical nature of information goods. In addition, marketing and research and development can increase sunk costs significantly. It can be more profitable for the company to differentiate information goods, so that higher perceptions of value can lead to premium pricing and higher revenues.
On the other hand, the electricity industry will be defined by its ability to be a cost leader, primarily through an efficient peak pricing system. Electricity is not something that can be differentiated, because it is perceived as a basic commodity, like water. Electricity companies can be more competitive, if they can apply peak load pricing in the most efficient terms, wherein it can find ways to maximize capacity usage, without necessarily increasing peak capacity usage, such as the example given by Preston McAfee for aluminum smelters (280). Aluminum smelters are interruptible consumers that can be turned off during peak capacity usage, thereby saving electricity companies from incurring additional capacity expansion costs.
To conclude, the differences between the pricing issues Varian describes for information goods and those we looked at for peak capacity pricing greatly affect the competitiveness of the electricity and information sectors. Information companies can be more competitive through cost andor differentiation leadership, while electric companies can be more competitive through an efficient peak pricing system.