Strategic Analysis of Agency Contracts for Pricing of Digital Goods

Production and Operations Management, 2016

18 Pages Posted: 14 Jul 2014 Last revised: 14 Aug 2016

See all articles by Yinliang (Ricky) Tan

Yinliang (Ricky) Tan

Tulane University - A.B. Freeman School of Business

Janice Carrillo

University of Florida - Warrington College of Business Administration

Date Written: July 12, 2014

Abstract

The advent of digital goods has made a significant impact on the current traditional (physical) goods markets for items such as movies, music, video games, and books. Firms that manage both traditional and digital goods distribution channels are facing many emerging operational challenges. One of the most pivotal problems for these media related industries concerns the supply chain contract model utilized for the distribution of digital goods alongside their traditional counterparts. Recently, the agency model exploited by publishers in the e-book industry has been highlighted in the press as a result of the U.S. Department of Justice’s (DOJ) lawsuit against Apple, Inc. Chief amongst the DOJ regulators’ complaints was that e-book prices increased and consumer surplus decreased as a direct result of the agency model. We investigate the strategic impact of the agency model in comparison with the prevalent wholesale and fixed price models by formulating a dual channel model of distribution accommodating sales of both traditional and digital goods. In contrast to the current press concerning the DOJ’s lawsuit, we find that the equilibrium price of digital goods is lower in the agency model than in the conventional wholesale model. Furthermore, the agency model can increase firm’s profit as well as consumer surplus by mitigating the double marginalization effect within the digital goods supply chain. Finally, we also conceptualize the similarity and differences between the agency model and revenue sharing contracts.

Keywords: digital goods; channel coordination; e-book industry; agency pricing

Suggested Citation

Tan, Yinliang and Carrillo, Janice, Strategic Analysis of Agency Contracts for Pricing of Digital Goods (July 12, 2014). Production and Operations Management, 2016, Available at SSRN: https://ssrn.com/abstract=2465447 or http://dx.doi.org/10.2139/ssrn.2465447

Yinliang Tan (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Janice Carrillo

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

HOME PAGE: http://warrington.ufl.edu/contact/profile.asp?WEBID=1274

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