An Empirical Analysis of Digital Music Bundling Strategies
39 Pages Posted: 20 Mar 2014
Date Written: March 18, 2014
We use panel data on digital song and album sales coupled with a quasi-random price experiment to determine own- and cross-price elasticities for songs and albums. We then develop a structural model of consumer demand to estimate welfare under various policy relevant counterfactual scenarios. This approach represents an early application of the “big data” management paradigm within the media industries, and provides managers with detailed guidance on optimal pricing and marketing strategies for digital music.
Our results show that tiered pricing coupled with reduced album pricing increases revenue to the labels by 18% relative to uniform pricing policies traditionally preferred by digital marketplaces while also increasing consumer surplus by 23%. Thus, optimal tiered pricing can yield a Pareto-improvement over the prior status quo. Additionally, our results indicate that in the digital world, unbundling albums outperforms “album only” pricing policies that dominated the era of physical CD/cassette sales.
Keywords: Information Goods, Bundling, Digital Music, Price Elasticity, Natural Experiment
JEL Classification: L1, L82, M2, O3
Suggested Citation: Suggested Citation