Peer-to-Peer Sharing of Subscription Services: A Non-Discriminatory Approach to Price Discrimination with Resale

Abstract

Resale of used products may shrink the new-product market and create the cannibalization problem. This problem is exacerbated in the digital goods market because copies of digital goods can be perfect substitutes of the original. Many digital goods/service producers take advantage of technology (e.g., digital rights management or DRM) to restrict resale of their digital products. In this paper, we posit that resale of digital goods may not necessarily be a concern. Instead, product resale can be an effective tool of managing heterogeneous demand---thanks to the traceability of resale and the control over usage allowance. Specifically, we consider a digital goods/service seller, e.g., an e-book platform, a telecommunication carrier or a cloud storage provider, who offers a contract to a group of heterogeneous customers at a fixed price for a specific amount of usage allowance. Instead of implementing restrictive barriers to sharing, in this contract subscribers are allowed to share their allowances with others in a peer-to-peer resale market at a transaction cost that is determined by the seller. We characterize the optimal terms of the sharing contract and quantify its performance. We find that the seller's optimal strategy is to facilitate reselling by imposing zero transaction cost. The sharing contract achieves the same outcome as a two-part tariff, in which subscribers pay first an entry fee for the access to the service and then a marginal rate of usage. Not only do they yield identical revenue, they also achieve the same market coverage and result in the same demand and individual surplus for customers of the same type. Therefore, the sharing contract is effectively a vehicle of price discrimination. This finding also challenges a conventional belief that the success of price discrimination has to be relying on the prevention of reselling. Our result demonstrates that resale is not necessarily detrimental to price discrimination: resale is instead a necessary condition for price discrimination if the digital goods/service contract can be written on terms of price and usage allowance.