An Empirical Analysis of Digital Music Bundling Strategies

39 Pages Posted: 20 Mar 2014

See all articles by Brett Danaher

Brett Danaher

Chapman University - The George L. Argyros School of Business & Economics

Yan Huang

Carnegie Mellon University - David A. Tepper School of Business

Michael D. Smith

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Rahul Telang

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Date Written: March 18, 2014

Abstract

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

Danaher, Brett and Huang, Yan and Smith, Michael D. and Telang, Rahul, An Empirical Analysis of Digital Music Bundling Strategies (March 18, 2014). Available at SSRN: https://ssrn.com/abstract=2411238 or http://dx.doi.org/10.2139/ssrn.2411238

Brett Danaher (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

Yan Huang

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Michael D. Smith

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States

HOME PAGE: http://www.heinz.cmu.edu/~mds

Rahul Telang

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

4800 Forbes Ave
Pittsburgh, PA 15213-3890
United States
412-268-1155 (Phone)

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