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In the presence of network externalities, we consider a supply chain which consists of a publisher and a retailer, both e-books and physical books are simultaneously sold to consumers. We analyse pricing strategies of the publisher and the retailer under two different models which are widely used in the real market: the agency model and the wholesale model. We find both retail prices of e-books and physical books in the agency model are lower than that in the wholesale model. However, we show that both sides have opposite preferences for pricing model when the substitute level between e-books and physical books is moderate. Our results may explain why retail price of books in China is much lower than in developed countries to some extent. Our results suggest that the retailer should strive to provide more different qualities of e-readers to the consumers and negotiate with the publisher for more e-book titles available on his/her e-reader.

Considering that the consumers are heterogeneous, we analyze pricing and investment strategies in a two-echelon supply chain of digital products which comprises a manufacturer and a retailer. Firstly, we construct demand function of digital product based on the consumer types by introducing product quality. Three different supply chain models are considered: vertical integration model, Cournot model, and manufacturer Stackelberg model. We study the players’ optimal strategies under these three models and focus on analyzing the effects of the players’ power balance on equilibrium optimal pricing and investment. We find the aggregated profits of both sides and investment cost are the highest in vertical integration model. The price of the digital product is the lowest in vertical integration model in most cases, as the customers hope. Finally, we offer managerial implications and direct the further work.

ABSTRACTIn this paper, we analyse the pricing strategies and the level of digital rights management (DRM) protection in a two-echelon digital product supply chain that consists of one manufacturer and one retailer. Two different market structures are considered: Manufacturer Stackelberg (MS) and Vertical Integration. We show that the manufacturer could obtain more profit than the retailer in the MS model, and the joint profits of both sides in the VI model is no less than in the MS model. Further results are obtained by comparative analysis. We also examine how the quality of the digital products and the copyright enforcement impact the development of strategies. Our analytic results can help the firms choose appropriate DRM policy and optimal pricing for their products. It is also expected that the results can give an advice for the government developing the appropriate copyright enforcement.