Selling or Renting: Competition of Electronic Book Retailers

Online e-book retailers used to sell e-books directly to consumers. Motivated by the successful subscription/renting programs by other operators of information goods such as video stream and TV (e.g. Netflix.com), many e-book retailers have recently introduced their subscription-based program. This study presents an economic approach to the analysis of the competition between an e-book retailer using selling method (EBS retailer) and an e-book retailer using subscription/renting method (EBR retailer). We derive the equilibrium outcomes and analyze the factors that affect the equilibrium outcomes under both scenarios of complete and incomplete information. Our results suggest that larger difference between the EBS retailer and the EBR retailer leads to higher prices and an increased service level for EBR retailer. We find that factors such as quality of e-book subscription program, the EBR retailer’s variable cost of service operation and usage rate will also affect equilibrium prices. Under information asymmetry, we show that the EBS retailer can adjust his price based on his estimation of the EBR retailer’s strategy. We extend the model by incorporating factors such as value depreciation and hybrid pricing model, and most of our results will hold.