Intertemporal Price Discrimination with Complementary Products: E-Books and E-Readers

58 Pages Posted: 21 Feb 2016 Last revised: 21 Feb 2018

See all articles by Hui Li

Hui Li

Carnegie Mellon University

Date Written: February 19, 2018

Abstract

This paper studies intertemporal price discrimination (IPD) with complementary products in the context of e-readers and e-books. Using individual-level data (2008-2012), I estimate a dynamic demand model for e-reader adoption and subsequent book quantity, reading format, and retailer choices in several book genres. I use the estimates to simulate a monopolist's optimal dynamic pricing strategies when facing forward-looking consumers. The results illustrate how skimming/penetration pricing incentives for e-readers and harvesting/investing incentives for e-books interact in this novel setting. The optimal joint IPD strategy is skimming for e-readers and investing for e-books. Counterfactual results suggest that combining IPD with complementary product pricing improves firm profitability because it attenuates the limitations of each pricing approach. In a single-product IPD setting, firms' pricing power is limited when consumers anticipate future price changes and delay purchases. Adding complementary products offers firms two pricing instruments; opposite price trajectories provide conflicting incentives for consumers, limiting intertemporal arbitrage. In a static complementary product setting, firms' pricing power is limited when the relative elasticity between the two products is heterogeneous and conflicting among consumers. Adding IPD sorts heterogeneous consumers into different periods and reduces the need to balance across consumer types.

Keywords: intertemporal price discrimination, complementary products, e-book market, skimming and penetration pricing, harvesting and investing

Suggested Citation

Li, Hui, Intertemporal Price Discrimination with Complementary Products: E-Books and E-Readers (February 19, 2018). Available at SSRN: https://ssrn.com/abstract=2735092 or http://dx.doi.org/10.2139/ssrn.2735092

Hui Li (Contact Author)

Carnegie Mellon University ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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