The Agency and Wholesale Models in Electronic Content Markets

26 Pages Posted: 9 Aug 2012 Last revised: 10 Sep 2018

See all articles by Justin Johnson

Justin Johnson

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: August 1, 2018

Abstract

I analyze a model of dynamic competition between retail platforms which exhibit consumer lock-in. Two different revenue models are considered, one in which platforms set final retail prices and one in which the suppliers set final retail prices. Platforms have long-term (or strategic) pricing incentives but suppliers do not, which implies that the inter-temporal price path faced by consumers depends on the revenue model in place. When suppliers set prices instead of platforms, prices may be higher in early periods but lower in later periods, suggesting that appropriate antitrust enforcement ought to consider more than initial price changes when an industry shifts to the agency model. Indeed, consumers may (but need not) prefer the agency model even when prices increase in initial periods. A potential downside of the agency model is that it may align the incentives of suppliers and platforms and thereby encourage platforms to lower the competitiveness of the supplier market, harming consumers; no such incentives exist under the wholesale model. I relate my results to events in the market for electronic books.

Keywords: e-books, agency model, Amazon, Apple, delegation, antitrust

JEL Classification: K00, K2, L00, L4

Suggested Citation

Johnson, Justin, The Agency and Wholesale Models in Electronic Content Markets (August 1, 2018). Available at SSRN: https://ssrn.com/abstract=2126808 or http://dx.doi.org/10.2139/ssrn.2126808

Justin Johnson (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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