Comparison between the agency and wholesale model under the e-book duopoly market

Abstract

This paper provides a comprehensive comparison between the agency and wholesale model under the electronic book market duopoly. A model comprised of two retailers and a publisher was established to run the comparison in terms of price, profit, and welfare. We found that although better e-reader offerings may seem favorable in terms of e-book pricing, the actual effect on e-books is limited or even negligible. High wholesale price leads to higher retail prices of e-books and e-readers under the wholesale model than the agency model. Generally speaking, the total profits of e-books returned to the retailers under the wholesale model are lower than those returned under the agency model; conversely, the publisher obtains higher profits under the wholesale model than the agency model despite its power over e-book pricing. We also found that consumers are more likely to derive greater surplus under the wholesale model when the difference in available e-books is relatively narrow. If the wholesale price is low, however, the consumer surplus under the wholesale model is higher than that under the agency model across the board. Further, when the difference in e-books is very small, the total social welfare is minimized under the wholesale model compared to the agency model; low wholesale price but poor substitutability (or high wholesale price with relatively high substitutability) yield favorable social welfare under the wholesale model.