Pricing Strategy of eBooks in a Two-Sided Market under the Threat of Piracy

Abstract

This thesis analyzes the effect of piracy on the price of eBook when the publisher uses the market platform for the sale of eBook. Under the traditional sales mechanism, called “resale model”, the market platform or an intermediary purchases eBook from the publisher at a wholesale price and sets the retail price. Under the new sales mechanism, called “agency model”, the publisher sets the retail price directly and pays a share of revenue to the platform as a fee for its service. Using a theoretical model, this thesis compares the equilibrium outcomes under both sales mechanisms. It shows that the retail price is always higher in the resale model regardless of the presence of piracy due to the presence of double marginalization associated with the resale model. In the presence of piracy, the size of the price increase is higher under the agency model due to investment in Digital Right Management (DRM) by the publishers. Under the agency model, publisher can recoup DRM cost only by setting higher retail price. However, under the resale model, platform recovers DRM cost in two ways: paying lower wholesale price and charging on retail price. Therefore, the demand for an original eBook reduces more with piracy under the agency model than under the resale model. The equilibrium amount of investment for DRM is the same under the both models, because consumer’s piracy behavior does not relate to the pricing model adopted by the industry. The amount of profits for publisher and marketplace vary according to pre-specified share of revenue. This thesis suggests that, in the presence of piracy, the agency model may not be a better strategy for the publisher if the market structure is monopoly; the resale model may be better for the publisher in this situation.