Digital Movies at One Simple Price: The Effect on Competition

Abstract

The ability to digitize information goods such as music and movies and the growing accessibility of the Internet has led to the emergence of a new class of retailers that specialize in digital downloads. The digital retailers have changed the dynamics of the information goods distribution channel. The competition between online and traditional retailers has led to interesting pricing policies. Online retailers (e.g., iTunes Store) tend to prefer uniform pricing where all products in the same category (e.g. New Releases) carry a single price, while traditional retailers do not have a policy of uniform prices. It is important to understand why one retailer should choose a single, uniform price and what impact it has on the competing retailer who chooses multiple prices. I focus specifically on the impact that single price policy adopted by digital retailer has on the traditional retailer. I also analyze the choice of uniform vs. differentiated pricing by modeling the competition between online and traditional retailers for vertically differentiated information goods. Importantly, I demonstrate how the asymmetric equilibrium we observe in the market today can change systematically with the nature of competition between the retailers.