Abstract

This paper studies three digital media development models in virtual world. We characterize the reve-nue mechanisms behind each model, by incorporating the concept of horizontal and vertical supply chain integration of digital media industry. We incorporate the core value of digital media develop-ment in the first model, which considers digital media as information goods. Pricing, quality differen-tiation, quantity discrimination, and content design combined determine the VW popularity and the financial performance. Based on the first model, the second model incorporates the advertising reve-nue. It becomes essential to optimize both information goods revenue and advertising revenue, while increasing one would decrease the other due to the traffic dynamics. Based on the first two models, the third model considers both vertical and horizontal supply chain integration in the digital media indus-try. In this model, we add one extra dimension of network externality that leads to better understand-ing of consumers, suppliers, and their mutual interest. Based on these three models, we suggest several strategic implications that facilitate operations, increase revenue, and enhance consumer experience, including strategic alliance, reduction of virtual-real world barriers, and tailored advertisement.

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