The agency and wholesale models in electronic content markets

I analyze a model of dynamic competition between retail platforms in the presence of consumer lock-in. Two different revenue models are considered, one in which platforms set final retail prices and one in which the suppliers set final retail prices. Platforms have long-term (or strategic) pricing incentives but suppliers do not, which implies that the inter-temporal price path faced by consumers depends on the revenue model in place. When suppliers set prices instead of platforms, prices may be higher in early periods but lower in later periods, suggesting that appropriate antitrust enforcement ought to consider more than initial price changes when an industry shifts to the agency model. Indeed, consumers may (but need not) prefer the agency model even when prices increase in initial periods. A potential downside of the agency model is that it may align the incentives of suppliers and platforms and thereby encourage platforms to lower the competitiveness of the supplier market, harming consumers; no such incentives exist under the wholesale model. I relate my results to events in the market for electronic books.