A Pricing Model for the Internet of Things Enabled Smart Service Systems

How can firms price their products and services, as their ecosystems get smarter? In order to answer this question, this paper provides a stylized model and its expansion to characterize industries that have become smarter and connected through the introduction of smart devices, a.k.a. the Internet of Things. First, we propose a basic model for a duopolistic multi-sided market with externality effects. Next, we expand this model to a case that considers cross-market network externalities. Our results reveal that, even if Internet of Things technologies facilitate complex multi-sided markets, there is a strategic pricing solution for firm profits. Moreover, a strategic firm can benefit from aforementioned cross-market externalities in terms of higher market share and equilibrium prices. This study not only contributes to the theories of pricing information goods, but also provides a guideline for practitioners who make pricing and other strategic decisions for the Internet of Things enabled goods and services.