Fighting Together: Agency vs. Wholesale Distribution Contracts for Digital Content Supply Chains in the Presence of Piracy

Problem definition : Digital content manufacturers and retailers (platforms) frequently encounter the issue of digital piracy. To deter the consumption of pirated content, manufacturers enhance the quality of genuine products, whereas retailers often exert antipiracy efforts. Such efforts best work in coordination, which is achieved through financial incentives via two widely used contracts: wholesale and agency. In the absence of piracy, two results are well established: (a) an increase in the platform’s commission rate hurts the manufacturer in the agency model, leading to extensive litigation, but (b) the agency contract outperforms the wholesale price contract in channel coordination, leading to a win-win-win outcome for the content manufacturer, the platform, and the consumers. The presence of piracy can alter these results, although the digital piracy literature has focused primarily on the wholesale price contract. Methodology/results : We develop a game-theoretic model involving a digital content manufacturer and a retailer to examine the impact of digital piracy on both firms under wholesale and agency contracts. We show that, in the presence of pirated content, a higher commission rate in the agency contract can sometimes lead to increases in the quality of the genuine product, the manufacturer’s profit, and the consumer surplus. However, because the commission rate is often set as an industry standard and is thus exogenous, our research shows that the wholesale contract can sometimes outperform the agency contract, offering a win-win-win outcome for all stakeholders. Managerial implications : Our study offers valuable insights for academics and practitioners to understand how piracy influences contract preferences in a distribution channel. When consumers can access pirated content of sufficiently high quality, manufacturers should critically review the impact of the commission rate and rethink their contract strategies with retailers, including, counterintuitively, relinquishing control of the retail price to the retailer if the commission rate is too low.