J. Service Science & Management, 2009, 2: 394-399
doi:10.4236/jssm.2009.24047 Published Online December 2009 (www.SciRP.org/journal/jssm)
Copyright © 2009 SciRes JSSM
Study on Option Price Model of the Transaction of
Information Commodities
Changping HU, Xianjun QI
Center for Studies of Information Resources, Wuhan University, Wuhan, China.
Email: xianjun.qi@gmail.com
Received August 25, 2009; revised September 29, 2009; accepted November 1, 2009.
The option is viewed as an important too l of setting price in a ccordance with o bjective benefits and actual effectiveness
of information commo dities, as ensures that the holder of the option right acquires more benefits in the favo rable mar-
ket and reduces losses in the adverse market. And the information market, as a kind of typical monopolistic and com-
petitive market, is especially adequate for introducing the option theory to set more reasonable price and further to
improve the operational efficiency of information market. Hence, it is quite necessary to apply the option theory to the
transaction of information commodities. In this paper, after analyzing the applicability of the option theory to the in-
formation market and studying the option price of information commodities, the authors put forward the option price
model of the transaction , followed by a case study to demonstrate the validity of the model.
Keywords: Information Commodities, Market Mechanism, Option Pricing, Transaction Model
1. Introduction
With the development of commodity economy, incom-
plete market information, which creates difference value
between the cost and the profit of information searching,
and which has its special value, gradually evolves into a
form of independent commodity [1]. And information
commodities inevitably promote the emergence and the
development of information market [2]. As the product
of information commercialization, information market is
not only an independent and physical commodity market,
but also an invisible factor market included in other
markets [3]. Therefore, in the narrow sense, information
market refers to as some places, where people trade in-
formation commodities at a certain period of time; while
in the broad sense, it refers to all the relationships be-
tween the supply and the demand of information com-
modities, involving the whole course and the all fields of
the circulation of information commodities, from the
production to the consumption.
Information market, like the material market, could
only operate formally with the complete market systems
and flexible market mechanisms, namely, the supply and
demand mechanism, the price mechanism, the competi-
tive mechanism, risk mechanism, management mecha-
nism and other mechanisms [4]. And it is the price
mechanism that serves as the most effective way of re-
sources allocation in the market economy. The main
reason is that the price, as the most sensitive signal in the
market, could accurately and timely reflect the imbalance
between the supply and the demand of information com-
modities distributed to many different directions of utili-
zation to maximize the effectiveness. Therefore, pricing
is the primary task in the transaction of information com-
Regarding the price of information commodities, there
have been several pricing methods such as multiple pric-
ing [5], bundle pricing, discriminatory pricing, Ramsey
pricing and integrated pricing strategies etc. [6]. All of
them are classified as Net Present Value (NPV) methods,
based on the traditional pricing theories, neglecting the
impact of market uncertainty on the transaction of infor-
mation commodities. Since information commodities
have the characteristics of monopoly, externalities, pub-
lic product properties and a shorter life cycle, informa-
tion asymmetry are more common and information mar-
ket are more uncertain. Thus the above pricing methods
do not always make right prices identical with the real
value of information commodities [7].
In the middle of the last century, many researchers and
managers found that discounted cash flow methods, rep-
resented by NPV, led to ineffective resources allocation
[8]. Shortly afterwards many scholars, like Louis Bache-
lier, Paul Samuelson, Fischer Black, Myron Scholes,
Robert Merton and so on, began to seek other solutions
and put forward several transaction models under the
Study on Option Price Model of the Transaction of Information Commodities395
uncertainty conditions, which made a significant contri-
bution to option research. After analyzing those models,
it is easy to draw the conclusion that the option theory
had two obvious advantages in resolving the transaction
of information commodities: the one is that the option
theory dealt with the uncertainty under the condition of
observing the principles of the classic economics and
mathematics; the another is that the option method, re-
placing the inaccuracy with the complexity, is almost
applicable to every market.
Moreover, in the information market, the option of in-
formation commodities can objectively reflect the impact
of the uncertainty of information market and the flexibil-
ity of decision-making on the price and the value of in-
formation commodities, by assessing the value of options,
by analyzing the costs and profits of the both parties and
by setting a reasonable price, so as to achieve the optimal
allocation of information resources.
2. The Applicability of the Option Theory to
Information Market
2.1 The Option Theory
The option theory had been gradually developed in the
long-term practice of solving the uncertainty of the price
in the future market. Essentially, an option is also called
a option contract, which stipulates the right of the seller
or the buyer to choose to sell or buy a certain number of
underlying assets such as portfolio, financial assets and
physical assets at a fixed price within a prescribed time.
Thus, the option is no mere a financial derivatives, but
rather an objective right to choose. Obviously, the option
is a tool of transaction and pricing in the future market [9].
Previous studies suggested that the real option is de-
rived from the financial option. Its core idea is that in-
vestors should maximize the value of the project by mea-
ns of some market-based methods instead of subjective
probability methods and utility functions when they de-
termine the value of investment opportunities and choose
the optimal investment strategy. Simply, the real option
is a kind of realistic option defined by the option concept.
According to different holders of the right, options are
divided into a call option and a put option: the former is
the right that the option buyer purchases underlying as-
sets in terms of stated price and quantity within validity
of the option contract, and the latter refers to the right to
sell the underlying assets under the same conditions;
While according to the difference of exercise time, op-
tions are divided into American option and European
option: the former specifies buyers can exercise options
on or prior to any given trading day, and the latter is just
the opposite. Actually, the buyers of American call op-
tion can flexibly choose the best time that is most advan-
tageous to them, to exercise options according to the
market shift and the actual demand.
The most distinctive feature of the option is that an op-
tion grants the exercise right, rather than the obligation,
to the option buyer in the form of the contract. That is,
option buyers may make profits from the transaction
when the price of the underlying asset is higher than the
exercise price, on the contrary, they just avoid more
losses (aside from the value of the option) by giving up
their option rights. That is why the method of the option
is specifically suitable for the high-risk and strong flexi-
ble market. Especially, in the market with asymmetric
information, the option can help to reduce the risk caused
by the uncertainties of the supply and the demand, to add
the effectiveness of information commodities, and further
to reduce transaction costs by improving the market
2.2 The Option Features of Information
Some experts on the theory of the real option, like Dixit,
maintained that the irreversibility, the uncertainty and the
selectivity of the investment were just theoretic premise
of the research on real options [10]. In addition, as the
main form of information resources in the market econ-
omy, information commodities also fulfill the given pre-
condition: firstly, most information commodities are
technology-based or experience-based commodities, re-
quiring consume a majority of intangible capital that is a
part of submersion capital, difficult to recover invested
costs; secondly, as invisible values of information com-
modities, which often attach to material commodities, do
not directly create values, and useful values usually de-
pend on their own values and on the specific use condi-
tions, information market fill with many uncertainties
that are associated with the price, the quantity of supply
and demand, the quality as well as effectiveness and that
reduce the accuracy of assessing the real value of infor-
mation commodities; thirdly, the production and the
transaction of information commodities at different times
may result in quite different profits and risks due to the
long production time, the short life cycle, and the unpre-
dictable factors in information market. In a word, the
option of information commodities in the information
market, an invisible market, where both of the time and
the form of the transaction are extremely flexible, could
be regarded as the American option. The option holders
of information commodities maybe obtain more market
opportunities or reduce less losses by changing the oper-
ating scale, investing periodically, delaying, giving up
the option, and so on.
2.3 The Function of the Option in Information
Commodities Transaction
In the information market, various market mechanisms
are regulating the whole transaction course and the all
economical relationships to realize market equilibrium.
Copyright © 2009 SciRes JSSM
Study on Option Price Model of the Transaction of Information Commodities
According to western economics, market equilibrium
refers to that interrelated economic subjects, who start
from their maximal welfare, interact on each other con-
tinuously to adjust market parameters until the whole
economic system come up to a stable state. In theory, the
above market equilibrium is a sort of “point equaliza-
tion” that could realize Pareto Optimality. However, in
the real information market, the price of information
commodities cannot automatically regulate to a balance
between supply and demand, but to a certain range devi-
ating from each other. Therefore, information market
equilibrium is a kind of “domain equalization”, which is
not able to fully realize ideal Pareto Optimality. The
main reason is that information commodities have the
following three characteristics of indivisibility, external-
ities and uncertainty [11], and the first two issues could
be solved by pricing with marginal cost and by separat-
ing the social costs (profits) from individual costs (prof-
its), requiring use options to solve the third one to
achieve the transaction in the uncertain information
It is well known that the option promotes the transac-
tion mainly by diverting, avoiding risks and regulating
price. Researches indicated that the option model could
simulate optimal information system [12], and that the
option method could help to solve the problem of venture
capital investment of information technologies [13]. Yet,
in the uncertain information market, the price cannot
objectively reflect the real value of information com-
modities. Furthermore, it is difficult for two parties to
reach an agreement owing to the higher risk and the
wider fluctuation margin, which leads low market effi-
ciency. However, with an option granting exercise right
stead of the obligation, option holders could transfer risks
to their counterparts. And this way of transaction pro-
vides a special insurance, namely, reducing losses under
the adverse condition and obtaining more profits under
the favorable condition in virtue of the option of infor-
mation commodities, and is bound to ease the worries of
traders, reduce transaction costs, simplify the transaction
process and further to promote the circulation of infor-
mation commodities.
3. The Option Price of Information
The theory of option price is one most important
achievements of modern finance theory. In 1997, having
put forward the theory of option price, Myron Scholes, a
Professor of Stanford university and Robert C. Merton
received Nobel Prize for Economics of the year. And
then the formula of option price—Black-Scholes, which
is view as one of successful models of applied mathe-
matics in social science domain, has been used widely
for its simple operation and relatively accurate results
[14]. Although it was proposed aiming at the European
option at first, it could be quickly extended into Ameri-
can option that is able to pay the dividend in the option
period [15], and then:
The call option price is:
() ()
 2
The put option price is:
() (
  (2)
ln(/)(/ 2)SK ft
dd t
 ,
() 2
Nde d
, and
respectively stands for the cumulative distribution func-
tion of standard normal distribution of and ,
whose value may be acquired by inquiring the normal
distribution table; is the current price of underlying
assets; is the exercise price of underlying assets;
is the risk-free profit margin,
is the profitability of
underlying assets.
In the information market, however, information com-
modities are mainly divided into two categories: the first
one, independent of physical products, could be ex-
changed in a transaction without transferring the original
physical carriers, such as knowledge and decision; the
second one, integrated with physical carriers, carries out
a transaction which often accompanies by the exchange
of physical commodities, for example, a book or a
CD-ROM. Clearly, for the latter, the real value of infor-
mation commodities is difficult to separate from in the
whole value. Then this paper is aimed at the first infor-
mation commodity, which is independent of physical
carriers. Moreover, the meaning of each variable of in-
formation market is quite different from those of general
physical market. For example, the effective period of call
options of physical commodities does not ran over the
time of market transaction, meanwhile, information
commodities are on the other hand. Although these pro-
duced information commodities would be marketed im-
mediately, their effectiveness cannot accomplish right
now. As thus people do not regard variable prices within
a short time as the foundation for the decision whether to
purchase information commodities. Instead, they mainly
consider the following two issues in the long run: how
much effectiveness and risks would information com-
modities bring about? Could they achieve expected prof-
its? Now, if the full time from purchasing to using is as-
sumed to be an effective option period, represented by ,
represents the value fluctuation ratio of
information commodities (expressed by standard devia-
tion of expected rate of return ), represents the ex-
pected cash value of information commodities,
represents the cash value of information commodities,
Copyright © 2009 SciRes JSSM
Study on Option Price Model of the Transaction of Information Commodities
Copyright © 2009 SciRes JSSM
V represents the expected benefits of information com-
modities. Evidently, if was less than zero or was
lower than the expected, buyers would not purchase the
In addition,
C is determined by the two parts: the
expected additional benefits (R) and the proportional
coefficient of the dividend (L). Thus, R is equal to the
sum of additional economic profits caught by informa-
tion commodities of each year. However, information
commodities usually represent themselves in the form of
techniques, knowledge, recipes and other intangible as-
sets, which cannot create economic values directly, but
enhance productivity and benefits by improving produc-
tion processes. As a result, it is very hard to assess how
much economic values and effectiveness on earth the
information commodities brought about in the short time.
Therefore, R is just estimated value or reference value of
the industry during transaction. Besides, the inflation is
not neglected, and it is indispensable that cash flows
should be discounted to the present by a given discount
rate r. Thus, additional profits received by using the
method of net present value (NPV), are as follow:
4. The Transaction Model of Option Price
Absolutely, the price is the most sensitive signal of mar-
ket change and correspondingly, the price mechanism is
the most effective transaction mechanism in the market
economy. Under the function of the option, the price
could objectively reflect the supply and the demand of
information commodities, the competitive situation, the
management performance, as well as the risk index of
development and utilization. And it helps to improve the
operational efficiency of information market and further
to promote the optimal allocation of information re-
sources. In other words, the option devotes to achieve the
rational allocation of information commodities by pricing.
123 0
(1 )
However, most information markets serve as seller's
market, in which information asymmetry is very com-
mon, just for buyers’ lack of important information inclu-
ding commodities, markets and seller's credibility. Hence,
sellers often have a comparative advantage during the tr-
ansaction, which is carried out mostly based on the price
set by them. In this paper, taking a seller's market as an
example, the authors constructed the option price model
of the transaction of information commodities and then
analyzed how the option optimized the model in order to
improve the transaction in the information market.
Where, is cost factor, is the factor of quality
& performance, is the sales factor, is the pro-
duction capacity of the buyer after t years, is the
production capacity of the buyer before purchasing the
information commodity, r is the discount factor of the
currency, W is the profit of per unit of production after
purchasing and T is the monopoly coefficient of the in-
formation commodity. And the proportional coefficient
of the dividend (L) have to balance the profits of both
sides and depend on the funding of the corresponding
supporting facilities, noted as
C, namely, the propor-
tional coefficient of the dividend (L) is equal to the ratio
4.1 The Seller Price
In the information market, is used to stand for the
price set by the seller (a reasonable price, instead of ex-
orbitant price). And the seller consider the two main de-
terminants of production costs
Cand the dividend of
expected additional profits
C, where
three parts: the cost of material carriers( ), the con-
sumption of active labors
( ) and the opportunity cost
() , namely, ,where, ,
and , whose value is between 0 and 1, respec-
tively stand for the corresponding weight of the cost.
They are affected by some factors like the way of spe-
cific transaction, negotiation skills, the effectiveness of
commodities and the expected values of both parties.
100% 100%
 
In the above formula,
C is the application cost of
the buyer, assessed by experts, namely, M
Ca c
, Q
is the production of the buyer after using the information
commodities, is the application cost of the buyer after
using the information commodities. And the formula of
the proportional coefficient of the dividend (L) and the
seller price are as follows:
123 0
(1 )
Qc r
 
123 0
11223 3
( )100%
(1 )
bbbG G
Qc r
 
 
Obviously, the upper limit of the seller price:
Study on Option Price Model of the Transaction of Information Commodities
123 0
max1 12233
(1 )
bbbG G
 
The bottom limit of is: ,
where ought to meet the equation : .
Pmin1 12233S
PaCaCa 
min maxSSS
4.2 The Transaction Price
For buyers, the lower the transaction price is, the more
profits they obtain. However, their expected price can not
be lower than the lowest expected price of the seller, or it
cannot reach a deal. Meanwhile, buyers set a fuzzy value
of expected price which is generally higher than the bot-
tom limit of the seller price provided that the transaction
is concluded, that is, the two parties would soon reach a
deal at a transaction price P when the seller price was
absolutely propitious to achieve the expected return of
the buyer or much lower than the expected price. Never-
theless, it is rare. Instead, there is a more general situa-
tion that the seller price is so high that the consumer sur-
plus of the buyer is less than the expected return. In this
case, whether to reach a deal or not depends on whether
the consumer surplus of the buyer come up to the expec-
tation at the lowest price set by the seller. Then repre-
sented by letters, it is showed as follows. Substitute the
lowest price of the seller()into the formula of the
option price to compute the value of , which is not
less than the expected return to reach a deal after the
bargain, otherwise, the deal is failed.
(/2) (/2)
Vf tf
 
In fact, it is very complicated to introduce the model of
Black-Scholes to compute comprehensive evaluation of
the option, an absolute value of quantities. To simplify
the calculation, it is advisable to transform the above
formula into the expression of relative options. Further-
more, the difference between the present value of future
profits (S) and further out-of-pocket (K) determines
whether the buyer purchases the certain information
commodities or not. And then we can compute the option
price (V) of the critical point (i.e. S=K), then the ratio of
the price (V) and the value of profits (S) is just the im-
pact factor of the option price, noted as
. Now, substi-
tuting the equation of S=K to formula 1, we can see:
The traditional methods of evaluation regarded cost-
income ratio as the relative value without regard to the
option. When options that exist objectively are consid-
ered, the impact of the option price on the value of in-
formation commodities is expressed asS
, and then
the relative evaluation value of the real options (
similarly is estimated as follows:
It's crucial, therefore, to compare the value of
1, that is, if
>1, the buyer would purchase the com-
modity; otherwise, the buyer would give up the transac-
tion when
5. Case Study
Here, we assume that some company (A) has developed
the new generation of ERP, whose costs of material car-
rier are $50 million, the costs of active labor are $250
million, the opportunity costs are $300 million, and
which could add a profit of $100million per year within
the service life of 10 years, when the monopoly coeffi-
cient equal to 0.2. In the meantime, another company (B)
that would purchase the ERP of A, needs to cost $500
million to allocate the corresponding equipments and
staff. At this time, the fluctuation ratio of the value of the
ERP system
is 30% (
=30%), and risk free rate ()
is 8% (
For company A: the cost of production
300=600 (million dollars); the rate of profit commission
= 600 / (600 +500) = 0.545; the expected profit is 1000
million dollars; the expected profit commission
(1000+600)×0.545×0.2=174.4 (million dollars); Then re-
asonable price of A is =600+174.4=774.4 (million
dollars), and the floor price accepted by A is $600 mil-
lion while its highest price should be 1000+600=1600
million dollars, i.e., the range of transaction price P
meeting the requirements of 600<P1600 (million dol-
What if we use the method of DCF (Discounted Cash
Flow) to compute these parameters?
Well, the minimum amount company B need to pay is
600+500=1100 million dollars, and correspondingly, its
profit is 100×10=1000 million dollars. Clearly, in that
case, B would not purchase the ERP system since income
is less than the expense.
6. Conclusions
The real option is not so much a tool as a way of thinking,
which is greatly able to provide people with a scientific,
dynamic and strategic analysis framework, and which is
appropriate not only for evaluating the value and the
price but for arranging optimal actions to avoid risks.
Absolutely, it is the option with above excellent features
that has outstanding advantages in the information mar-
Copyright © 2009 SciRes JSSM
Study on Option Price Model of the Transaction of Information Commodities399
ket, where the option can effectively promote reasonable
distribution of information commodities in the aspects of
the time, the space and the type in order to maximize
their effectiveness. Therefore, from the standpoint of
economic profits, the option mainly regulates the benefits
of market players to optimize the price model in the vir-
tue of the price mechanism.
In a word, this paper proposed that information com-
modities had the characteristics of the option, that op-
tions played an important role in commodities transaction,
and that the classic model of the option price was applied
to set the option price of information commodities. Addi-
tionally, taking for an example of information commodi-
ties, we analyzed how the call option exerted its influ-
ence to buyers’ decision-making, as is of importance in
guiding the activities of information economy. However,
there are several problems to be further elaborated in the
future, for instance, combining the option theory with the
game theory to investigate some new laws and features
of information commodities in the information market
and further to improve the operational efficiency.
7. Acknowledgments
This paper is supported by the major project of National
Social Science Foundation of China under Grants
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