Abstract

Amazon recently began providing their customers with an innovative and contemporary service. This service supplies customers with the option to purchase an electronic version of a book after they have purchased a physical copy. This is similar to bundling an option of electronic book purchase to a physical one. Such a business practice provides consumers with an opportunity to resell brand new books, which will influence the welfare of publishers, retailers, and consumers. Using a two-period game theory model we discuss these impacts under two scenarios: monopoly of a retailer, as well as competition between retailers. We find that (1) Under a monopoly, the publisher sells at a higher rate, and the retailer sells at a lower rate in the equilibrium; consumers also see an increase in their total surplus; (2) Under competition, retailers who provide this bundle will gain a competitive advantage over the retailers who do not. Our research indicates that bundling a physical book with its digital version yields a win-win strategy for all players.

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