Abstract

The growth in electronic publishing, advancement in e-book reader technology and the advent of the internet has led to the emergence of e-books and a rental market for e-books. When the product is available in both digital and physical form, consumers’ willingness to buy is influenced by their preference for the form of the product (physical vs. digital) and their valuation of the product. Books are experience goods and consumers realize the true fit of the book to their tastes only after they have used the book for some time. Renting of e-books provides a sampling opportunity to the consumers. In this paper we examine the pricing and product line design strategies for the retailer through a two stage consumer behavior model. Finally, computational analysis is used to develop additional insights that cannot be obtained analytically. We recommend distinct pricing and renting strategies for underestimated and overestimated books. A key result is that providing an e-book is always optimal, and the retailer’s profit increases as the consumers’ preference for an e-book increase. We also found that it is not always optimal for a retailer to increase the consumer’s initial fit-perception.

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