Organizing Distribution Channels for Information Goods on the Internet

Abstract

Rapid technological developments and deregulation of the telecommunications industry have changed the way in which leading content providers distribute and price their goods and services. Instead of selling both content and access through proprietary networks, these firms are shifting their distribution channels to the Internet. Data customers can now select their Internet Service Providers to gain access to the Internet for a set monthly fee. The marginal charges for these Internet telecommunication services do not depend on distance, time and the content of the data. We study the economic and competitive impact of this vertical disintegration on the proprietary content providers, Internet Service Providers and the end consumers. We show that, despite the reduction in the scope of their service, the content providers may raise their prices to increase their profits. As a result, customers who are closer to the content provider's gateway may give up certain data services. On the other hand, new subscribers from remote locations will now enjoy the opportunity for additional data services because using the Internet will significantly reduce their telecommunication costs. Furthermore, as the number of access providers increases, their profits decrease and the fraction of customers who gain access to proprietary content increases. Some of the savings from the continuous reduction in telecommunication costs afforded by the Internet will be taken away by the proprietary data providers, who exploit their monopolistic market position. Consequently, a significant fraction of the potential customers may be priced out of the market.

JEL Classification: L23, L86